Evolution, Uncertainty, and the Asymptotic Efficiency of Policy

Abstract

Politics, like any social process, involves selection mechanisms that determine whether the outcomes of the process are efficient. This paper presents a model of politics as an evolutionary process. The decisions of interest groups to enter politics determines the selected policy. Our model leads to three main results. First, the political process selects for efficient policies in the long run. This mirrors how markets select for efficient firms. We call this attribute asymptotic efficiency. Second, the bargaining of interest groups bounds the level of inefficiencies that can exist in the short run. The bound decreases when organizing interest groups becomes less costly. Finally, policies that appear inefficient in a static analysis can be efficient once economists consider the dynamic nature of political decisions. We argue that viewing the political process as a selection mechanism allows political economists to use efficiency as a tool for positive economics. In our approach, applied political economy involves looking for relevant costs that make the policy efficient. However, our approach does not rob political economists of the ability to make meaningful normative statements, but only constrains the type of statements made.

Keywords: Real Option, Political Coase Theorem, Evolution, Efficiency, Alchian

JEL Classification: D70, D72, P16