Issues Involved in Decision Making Process

This article throws light upon the three major issues involved in decision making process. The issues are: 1. Voting Model 2. The Downs Theory of Democracy 3. Revealing Social Preference.

Issue # 1. Voting Model:

Rational allocation of resources for the provision of public goods, under public choice theory involves the political process based on voting models. Owing to free rider problem, optimal resource al­location to public good through price mechanism is impossible in a real world situation.

Some coercive form of collective decision making binding all individuals to a method of resource transfer is required. This decision making method should be one which takes into consideration the preferences of individuals in the society and capable of achieving operational efficiency.

The political process which involves the attitude and opinion of people is the best suited process. Democratically elected governments possess the coer­cive authority to execute this task.

In the allocation of resources, the government can determine the price or taxes to be paid by each citizen. For this the political participation of citizens is im­perative. Political participation is the involvement of citizen in the policy process. Of the many ways citizen participate, the common and most effective means capable of influencing public sector decision making process is voting.

Various research studies con­ducted from time to time indicate that voting is the most common and powerful form of political participation. Since government office bearers rely upon the votes of the citizen to get elected to office, there is an incentive for governments to try to choose those public expenditures which the citizen prefers and to provide them at least Cost.

However there is a major concern as to the efficiency of the political process to perform this task. There is no satisfactory explanation to this problem. No satisfactory model has so far been developed to explain how a political process can efficiently trans­mit the preferences of citizens to the government for policy formu­lation and implementation.

Since 1950 a few voting model has been developed, which is capable of providing, some insights into the process of evolving rational collective decisions. Many of them are models of direct democracy, where as some others are rep­resentative democracy.

Voting is a primary means for citizen to participate in the political process and various institutional factors affect this from of political participation. Institutional frame work of the voting process is an important determinant of voting behavior. Voting theory is complex and sophisticated.

Issue # 2. The Downs Theory of Democracy:

Prof. Anthony Downs provides a competitive model towards the revelation of individual preferences in the political process. The Buchanan- Tullock model unveils the problem as one of designing appropriate voting mechanisms to internalize the gains from trade.

Whereas Downs analysis proceeds the role of political parties in the decision making process of the public sector. He considers the political system with two or more political parties that compete with each other, periodically for power. Hence the system rules out logrolling.

However the system exhibits a form of vote trading. Each party comes with a concrete set of proposals on fiscal measures for acceptance and power. The model views a political party in terms of its vote maximization motivation for the purpose of retain­ing political power.

The downs model of political decision making retains the assumptions of self-interest on the part of voters. At the same time the model emphasizes the rule of political parties as the institutions through which the bargaining or coalition of likeminded voters are affected.

Therefore it is an explicit model of represen­tative democracy in which political parties are independent entities whose objective is to gain office by maximizing votes.

Within a given constitutional frame work Downs model as­sumes the existence of two political parties in which voters at­tempt to maximize their expected utility. In the two party system, voters will vote for the party which given its policy announcement, will give them the highest value for their expected utility.

In a multiparty political system people may have sub-preferences among parties. Voters who favour a third party may decide not to vote for it, if they have a sub-preference between the two main parties and if they think that the third party has no chance of winning. In this kind of system the same political party will not always receive the majority voters.

A. Matching of Policies:

Suppose the preference of all Voters are single peaklod and that the distribution of voters according to their most preferred political party or policy is unimodal. It is then clear that the ruling party (that is the vote maximizing party) will tend to cater to the position given by the median voter.

It is optimal for opposition party (in a two party system) to be also near to the median. To take a position distant away from the median, would unnecessarily forfeit many of the votes between the two parties.

If distribution of people according to their political preferences has more than one mode, then there is every incentive for other parties to come up. Then the system will not be stable.

If the distribution of voters according to their most preferred point on the spectrum of political platform is (e.g., left, centre, right etc.) unimodal, a phenomenon known as the Hotelling principle or the principle of minimum differentiation will result and the political system will be stable.

This fact is discovered by Hotelling (1929) and popularized as the median voter theorem. Hotelling (1929) and Downs (1957) used the median voter theorem to predict outcomes in a two party democracy.

The following figure explains the case where preferences are single peaked and unimodally distributed over a spectrum which can be ordered from left to right. Then the vote maximizing party will choose the position given by the median voter.

The optimal strategy for the opposition party at a given point of time would be to take a position nearer and closely matching to that of the party in power.

Figure 2.15 shows the distribution of voters from left wing political ideology to right-wing political ideology. The distribution is assumed to be unimodal and symmetric.

If the initial party positions are ‘L’ and ‘R’ ‘R’ is voted to power. ‘R’ obtains votes from those to the right of ‘R’ as well as votes from those between ‘X and R’, in which ‘M’ is, the midpoint between ‘L’ and ‘R’.

‘L’ receives votes from voters to its left as well as the votes of those between ‘L’ and ‘X’. Now ‘L’ can increase its votes as can ‘R’ by moving closer to the centre. The ensuing competition among the two parties will then ensure that each party will occupy the middle ground.

In other words they will adopt the ideal position of the median voter. Voting paradox discussed above clearly shows that the outcome of the majority voting process may exhibit cyclical majority or intransitivity of social preferences.

B. Coalition of Minorities:

When multidimensional political issues crop up, situations may emerge in which opposition parties can defeat the party in power. Downs argues that this is materialized when the opposition parties (acting jointly) take a strong stand on different issues in favor of minority group that feel strongly about these issues. This is pos­sible under the following circumstances.

More than half the voters must be in the minority on at least one issue and they must hold stronger preferences for those views when in a minority than those for which they are within the majority.

Furthermore the party in power must reveal its position before the other parties do at least on those issues which have minorities with strong views. But these are strong requirements.

In the real would situation, both voters and political parties are greatly uncertain about different issues. Hence the political parties may be reluctant to drastically change their policies from election to election.

This adds to stability and raises a question mark on the success of the coalition of minorities, in a world of certainty, the Downs revelation, give us pareto optimal supply of public goods. In the real would there is tremendous uncertainty about the future. People are then confused about the effects of state policies on Sheir utilities. In this situation according to Downs public goods would be under supplied.

Median voter theorem is the proposition that preferences of the median voter are chosen when several condition, such as all preferences being single peaked are present.

The median voter model provides insight into the policy position of elected represen­tatives, who under representative democracy are elected by voters. Since policy makers are elected by simple majority under majority rule the median voter model demonstrates that positions chosen by policy makers tend to be those of the median voter.

C. Arrows “Impossibility Theorem”:

Revealing social preference through majority voting involves a number of issues to be addressed. A series of analysis in this regard centre around the problem as to how to make societal decisions consistent with individual preferences in group voting within a democratic political process.

Professor Kenneth Arrow expressed serious doubts regarding the efficiency of the majority voting rule, to reconcile between individual and group decisions. Given the information about the desires of the various persons who make up the group, the problem is that of setting up reasonable procedures for the reconciliation of those desires into a group decision.

Prof. Kenneth Arrow proposed the following four condi­tions which social preference must meet in order to reflect individual’s preferences:

1. Social choice must be consistent (transitive) in the sense that if ‘X’ will be decided in preference to ‘Y’ and ‘Y’ in preference to ‘Z’ then ‘Z’ will not be decided in preference to ‘X’.

2. The group decisions must not be dictated by anyone outside the community or by any one individual in the community that is social choice must not be dictatorial. Social choice must not be based solely on the preferences of one individual independently of the choice of other individuals.

3. Social choice must not change in the opposite direction from the choices of the members of that society. That is social welfare function must be ‘ non-perverse’, in the sense that an alternative which would otherwise have been chosen by so­ciety must never be rejected just because some individuals come to regard it more favorably.

4. A social decision as between two alternatives must not change so long as no individual in the community changes the order in which he ranks these alternatives in accord with his prefer­ences.

That is the social preference as between two alterna­tives ‘X’ and ‘Y’ must depend only on peoples opinion of just these two alternatives ‘X’ and ‘Y’ and not on any other alter­natives. In other words the elimination of any one alternative must not influence the ranking of the other alternative in the social welfare function.

In a sense these requirements for social choice may seem a rather appropriate set of condition for democratic decision making. When voter’s preferences are well ordered the outcome of majority vote is the median voter. However preferences aren’t always well ordered.

Very often multiple peaked choices may take the place of single peaked choice. Prof. Kenneth Arrow has presented the problem systematically in the form of a “paradox of voting “.

He has demonstrated that it is impossible to choose among all pos­sible sets of alternatives without violating at least one of his four criteria. He argues that social choice must be in a sense incon­sistent or undemocratic.

Suppose there are three voters. ‘A’ ‘B’ and ‘C’ and three budget alternatives. These budget alternatives relate to the provi­sion of three public goods namely a school building (S), an hospital (H) and low cost housing to poor (L).

It is further assumed that the same amount is to be spending on them. The voter rank their preferences 3, 2 and 1., in order of preferences with 3 most preferred. Each voter has a transitive preference ordering, which is shown in table No.

A perusal of information given in table shows that both ‘A’ and ‘C’ prefer ‘S’ to ‘H’ that ‘A’ and ‘B’ both prefer ‘H’ to ‘L’ and that ‘B” and ‘C’ prefer ‘L’ to ‘S’. Here we can see that majority voting can easily lead to intransitive social choice patterns, even though every voter has transitive preferences.

This shows the case of multiple peaked choice where no clear cut majority decision is possible. It is called the cyclical majority problem, or Arrows paradox of voting. It implies that the results of the majority voting are arbitrary,”depending more upon the order in which issues are presented rather than upon the preferences of the voters.”

Moreover when cyclical majority problems exist, we can no longer assume that the result confirm to the preference of the median voter. Prof. Arrow has demonstrated that it is impos­sible to choose among different alternatives placed before the voters without violating at least one the four criteria already stated. This is the central theorem of Arrow known as Arrow Theorem’.

Issue # 3. Revealing Social Preference:

In any democratic Society. Optimum provision of public goods requires efficient allocation of societal resources. For the attainment of efficient allocation of resources the political process is impera­tive.

However an array of institutional problems arises in the revela­tion of individual preferences based on democratic political sys­tem. The majority rule is difficult to realize.

In small number of situations cyclical majority often occur. Moreover there is no assurance that the majority rule is the most efficient method to maximize satisfaction. The majority rule offers no way to account for difference in the intensity of feelings between voters. For example the simple majority voting rule cannot ensure individual preferences revealed on the basis of the concept of an equal vote for all.

In a simple majority voting system. Majority of 50 percent plus one vote may carry a decision. Correspondingly the decision so attained become bind­ing on a minority 50 percent minus one of the citizens whom may possess serious reservation about the tax sharing and allocation of the public good.

The Swedish Economist, Knut Wicksell, raising concern for the interest of minorities observed that complete unanimity (abso­lute) is required before any addition to the public budget allocation is adopted.

Wicksell argues that absolute unanimity (100 percent approval) would be required in a democratic political system, in which no individual can be forced to pay for unwanted economic goods. But sometimes a single negative vote would be sufficient to block a budget policy under conditions of absolute unanimity.

Therefore Wicksell realized the fact that sometimes absolute una­nimity would lead to an essentially inactive budget system. Very often this may create a situation in which the most essential public good to all other consumers in the society may be denied on account of a particular persons single negative vote.

Therefore Wicksell introduced the concept of obtaining relative unanimity or qualified majority voting. This rule simply suggests that the qualify­ing (approval) percentage for a budgetary policy should be as near to 100 percent, as possible (absolute unanimity).

For example in any democratic set up a majority of two third, three fourth or five sixth can be considered as the required percentage for the ap­proval of a budget policy under the concept of relative unanimity rule.

This will give a positive signal to each individual in a large group that his or her negative vote by itself can never block a budget proposal concerning the provision of a vital public good that benefit of which may flow to the majority in the group.

Auto­matically considering the societal impulse individuals may abstain from negative strategy as would be the case under absolute una­nimity rule. Any proposal if it fetches some personal benefit to an individual may be accepted under the principle of relative unanim­ity.

Wicksell also recognized the need for making expenditure and tax decisions simultaneously in the legislature to ensure a tie up between spending and revenue decisions.

Each expenditure plan was to be accompanied by a tax plan and this should be matched against the option of no change Successive proposals were to be made, each with a slightly different expenditure and tax plan till one received approval of the required unanimity or until a reason­able number of combinations were defeated in which case no budget change would be made.

Reductions in the budget were to be made in a similar fashion. The marginal benefit from a public expenditure should be related to the marginal tax cost of providing the public good. Then the relative unanimity rule should be applied to the joint decision. Use of this technique will help to enhance the minority’s ability to influence the outcome.

1. Social Preference Revelation through Point Voting:

When a point voting system is used each voter is allotted a certain number of points and he will be allowed to distribute them among the choices as he likes. Ideally he can distribute points in approximation of his relative preference among the alternatives.

Sometimes he may give all of his points to one alternative and none to the rest. Such a system will often yield different results from those of the majority or plurality rule.

The point method of voting emphasizes the relative intensity of preferences among alternative budgetary policies. In a simple majority voting rule 51 out of a group of 100 voters can bind a minority of 49 voters to a budget policy which is not preferred by the minority.

The simple majority rule nearly counts the numbers of winners and losers. The relative preference intensities of the voters for the budget policy are ignored. The point voting rule takes into account this problem.

There are three voters Anand, Babu and Govind. They have to choose among three budget policy alternatives namely X, Y, and Z, with different tax and expenditure plan. Sixty points are given to the voters to divide among the three budget policy alternatives in accordance with their preference. From the table it is clear that voter Anand, assigns ail sixty points to the proposal ‘Z’.

Voter Babu assigns 30 points to alternative ‘X’, 20 points to ‘Y’ and 10 point to Z’. Whereas voter Govind allots 15 points to ‘X’ alternative, 20 points to ‘Y’ and 25 points to Z’. In this allocation alternative ‘Z’ is selected. The total points for the three alternatives are. X = 45 points, Y = 40 points and Z = 95 points.

Even in the point voting system it is possible to have situa­tions with indeterminate results. However the technique allows for finding a winner much more frequently than the majority or plurality rule.

Consumer sovereignty in the market sense appears to be more closely in point voting than in simple majority voting. The relative preference pattern of individuals is more taken care of in point voting rule.

The relative preferences for various budget policy alternatives was further elaborated and emphasized by James. S. Coleman. Coleman is of the view that Arrows Impossibility theorem is relevant only to those social choice mechanisms in which relative intensi­ties of desire between policy alternatives cannot be expressed.

Coleman developed a slightly variant approach for revealing social preference in which the problem of individualistic choice and social welfare are considered in terms of utility maximization under con­ditions of uncertainty.

He argues that in a market oriented Allocative system a consumer can purchase or reject an economic good. Where as in the political process of societal resource allocation, a voter can only passively influence a policy outcome. Therefore uncertainty and risk are prevalent in the process of public sector allocation of resources.

When the outcome of a policy choice is uncertain and risky, each individual voter attaches a subjective probability to each possible outcome. This is a process of taking decision regarding expected utility under conditions of imperfect knowledge and risk.

The consumer then considers the expected relative sizes of utility differences between various possible out­comes. Coleman states that uncertainty can influence public sec­tor decisions in democratic institutions.

2. Political Process and Incentive Mechanisms:

An individual may play one or more of many roles in the process of deciding the economic activities of the public sector. His partici­pation in the election of representatives may range from non-voter to party worker, to campaign manager and even to candidate.

On a particular tax or spending issue he may participate as a voter, an agent head, a budget official, a people representative and so on. The voting public elects many government officials and thereby empowers them to make and enforce government policy.

The vot­ing decisions of the public therefore determine who will run the government and indirectly influence a person’s vote. Other things being equal voter will favor the candidate whose policies they believe will yield them the largest net benefit or smallest net Cost.

Therefore a voter’s decision to vote depends on the benefits and costs of doing so, as well as on the probability that voting will help to achieve the anticipated benefits.

In a vibrant democratic society, the political process involves more than mere counting of voters and deciding on the rules for reaching agreement. Agenda for political actions must be drawn up, alternative proposal must be placed before voters and informa­tion on the costs and benefits of the alternatives must be made available.

In the political process, political parties act to propose alternatives to the electorate. In addition to this various special interest groups apply pressure to political parties and candidates to support proposals favorable to their constituents.

Bureaucrats, another cadre in the political process not directly associated with political parties or special interest groups, possess incentives to influence the outcomes of political interactions.

The results of political interaction can better be judged by looking into the incen­tives and behavior of different group and their influence on voters. The political process comprises the special political institutions of a given community and the behavior of politicians, special inter­est group and bureaucrats.

3. Bureaucracy:

The formation of a permanent government also implies the devel­opment of a bureaucracy. They are non-elected policy makers. They enjoy comparatively high permanency and stability in their employment.

Their primary responsibility is to execute the policies of the public sector derived out of collective choices, through political institutions. Very often the Bureaucracy influences the actual delivery of services and the efficiency with which such services can be produced. Hence their behavior determine the actual terms on which public goods are produced and offered to citizen.

The theory of Bureaucracy is associated with the work of William. A. Niskanen Jr. It is concerned with the study of the behavior of Bureaucrats. In the private sector managers seek to maximize profitability. But in the absence of profit criterion, Bu­reaucrats seek to maximize their budgets.

It is assumed that they try to add to the amenities of the workplace, to advance their ability to gain such perquisites as large, lavishly furnished offices and frequent non-essential trips in order to maximize their budget. William Niskanen argued that bureaucrats seek to maximize the power associated with holding public office.

Usually the power is likely to be correlated with the resources at the command of the bureaucrats. This in turn is determined by the size of the bureaus budget. Therefore Niskanen’s hypothesis is that bureaucrats al­ways try to maximize the size of the bureaus budget.

Niskanen assumes that the bureaucrats are primary interested in obtaining such things as higher salaries, prestige, power and patronage and the ability of any bureaucrat to obtain this things is positively correlated with the size of the budget which he administers.

Bureaucracy theory also argues that it is difficult for the elected policy makers to force bureaucrats to work for the general interest of the voters. Bureaucrats in general have long tenure of office. Hence it is impossible to discharge them.

4. Special Interest Groups:

Special interest group are lobbies that seek to increase govern­ment expenditures which benefit their constituents. They try to put pressure on political parties, candidates, bureaucrats and finally on voters, to support issues that benefit the members of their group.

Special interest group can even exert pressure to politi­cians by threatening to lobby their constituents to vote against them. They even make contribution to politicians who support their positions. The success of this interest group really demonstrates the weakness within the political process.

Apart from revealing social preference by voting, in modern democratic society, another way is by associating with likeminded persons to form interest group. These groups always try to achieve the objectives of their members. Professional association (Doc­tors, Dentist) Teacher associations, caste groups, religious asso­ciations, business associations, trade unions etc. fall within the net of pressure groups.

Some groups stand to promote the inter­est of their members, while others try to influence public policy with respect to a specific agenda, by lobbying the government (Greenpeace USA). Special interest groups exist to promote poli­cies favorable to workers, particular regions, and industries, racial.

Minorities, ethnic group, caste, environmental preservation (Narmade Bachavo Andolan) etc. For example the Narmada Bachavo Andolans often act as a special interest group in trying to persuade environ­mental protection agencies and environmentalists, through influ­encing public policy.

They even use their power to influence the votes of those who are not members or direct beneficiaries of their efforts. Persons are often members of more than one special interest group. For example a person could be a member of an occupational group and of a group that support his religions feel­ings.

In the political process the way in which policy makers filter the demands of special interest group from those of individual voters is a crucial issue.

5. Rent Seeking Activity:

Collective action can sometimes lead to rent seeking. Rent seek­ing is a part of the policy process in which special interest groups try to win favours. It is a process by which resources are used by special interest groups to obtain government favours.

In the lit­eracy sense economic rents are earnings from the use of re­sources that exceed the opportunity cost of those resources. Those who earn economic rent receive more income from the use of their resources, than would be made possible by employing those resources in the next best use.

For example if investors realize that economic rent is possible in the automobile hardware business, they will withdraw their fund from alternative investments so as to use it in the production of automobile hardware’s.

In the same way the government machinery in power give incentives to people to use the power of government to create and mobilize rent. The government can create rents for certain groups by conferring property rights to engage in certain activities.

For example in any country, based on the pressure inserted by special interest groups, government power is used to grant exclusive li­censes, franchises or permits to purchase certain goods for the sector.

The creations of this kind of property right generate entry restrictions into certain activities by others for buying or selling. This generates rent by creating artificial scarcity or surpluses. In representative democracies, the incentives provided to the special interest groups often persuade policy makers to redistribute in­come from the ‘many’ to the ‘few’.

For example sometimes mem­bers of strong professional occupational group may persuade and convince the government to restrict entry into the profession by establishing high standard norms. Apparently this will raise the price of service.

Those who are fortunate enough to be in the highly protected professions are capable of earning higher income than deserving. This will lead to a redistribution of Income in favour of the persons who enjoy government granted special privileges.

The resources (which include time, fees, strain etc.) for obtaining special privileges constitute social cost of rent seeking which in turn is termed as wasteful cost. Buchanan and Tuliock expressed serious concern about the special interest groups rent seeking activity, resulting in the redistributions of income through the policy process.

6. Directly Unproductive Profit Seeking Activity:

Closely associated with the concept of rent seeking is the Directly Unproductive Profit Seeking Activity (DUP) analysis in international trade. DUP’s are activities which are privately profitable where as it generate no increase in social product.

In the broader sense they are concerned with the distributions of national product rather its creation.

Prof. Bhagwati defined Directly unproductive Profit Seeking Activity “as ways of making a profit (i.e., income) by under taking activities that are directly (i.e., immediately in their primary impact) unproductive in the sense that they produce pecuniary returns but do not produce goods or services that enter a conventional utility function or inputs into such goods and services”.

The DUP concept is rather comprehensive. It includes all ways of making a profit by undertaking activities that are directly unpro­ductive. They yield income or profit but do not produce goods or services directly or indirectly.

By using up real resources they produce zero output. DUP activities include rent seeking. Apart from this they also cover activities where resources are devoted to encouraging policy interventions that create rent. For example lobbying efforts can be directed at creating or sustaining quota or tariff protection against imports.

One legislative change that would increase rent for home producers is the introduction of a tariff on imports. In return this will reduce the quantity of imports, so that the price of imported goods will increase.

As a result of this protectionist legislative change, home producers will receive a higher price for each unit of good they produce. Here a trade distorting activity, without leading to a change in output, generates an income or rent.

DUP also include activities framed to make money by evading policies. For example tariff evasion yields pecuniary in­come by exploiting the differences between legal (tariff paying) imports and illegal (tariff evading) imports.

In the real world tariff assumes different dimensions of opera­tion. One is tariffs evasions (smuggling) in which profit are made by getting around tariff.

Secondly tariff-seeking lobbying by pressure group that expect to protect from protection.

Thirdly revenue seek­ing lobbying that seeks to divert government revenue towards oneself as recipient.

Fourthly monopoly seeking lobbying who tries to create an artificial monopoly that generates rent. All these activi­ties are profitable without being directly productive. The various economic agents associated with these activities earn incomes (profits) using real resources, but without contributing directly or indirectly to output that enter the utility function.

Many of these activities are attempts to make profit by either getting around government policies (e.g., by tariff evasion) or getting governmental policies modified (e.g., by replacing free trade with a protective tariff).

Fiscal theorist like Buchanan. Tullock and Linbeck associated with the public choice school of thought have extensive analy­sis of DUP activities and its prominent place in the political pro­cess of decision making.