An Organizational Coase Theorem: Constitutional Constraints as Increasing in Exit Costs

Abstract

Collective action at impersonal scale involves losses to autonomy by definition because of the need to centralize some measure of authority. This stands as an important cost to collective action that varies in predictable ways depending on the extent of organizational choice available to members. By identifying characteristics at the fundamental institutional level linked to increases in self-determination relative to other organizational forms, I identify a structural tradeoff between exit costs and constitutional constraints with respect to the ideal of unanimity. Despite the long recognition of these institutional features as central to the processes of human social ordering, my analysis is centered in how each institutional solution to representative losses to collective decision making at scale reduces these losses relative to the other. As exit costs decrease, the losses to self-determination that collective action poses are increasingly resolved through individual choice, which makes the need for costly constitutional constraints fall in comparison. In a world of zero collective action costs, organizational choice would be infinite, and the initial distribution of organizations would always dynamically adjust to optimally reflect every individual’s preferences. But because collective action costs are never zero, some measure of constitutional constraints are therefore always optimal in the governance of impersonal organizations due to the representative losses these organizations entail.

Keywords: Governance, Institutions, Organizational Economics, Institutional Economics, Complexity Economics, Private and Public Ordering, Economic Institutions, Political Institutions, Political Economy, Complexity Theory, Power Laws

JEL Classification: B52, P48, L22, H10, O16, P51