Coasian bargains and structural reforms

The (im)possibility of political Coasian bargains?

The fact that second generation reforms have stalled since divided government came about in Mexico, poses the crucial question of why, if the net benefits of these reforms are so high, political key players cannot successfully bargain to implement them? A related question is how come the PRI was able to push reform in so many areas, while current government faces gridlock? The puzzles of political Coasian bargains actually permeate policy-making everywhere and deserve some clarification here.

A simplified Coasian bargain looks like this: “If the long run net efficiency gains of policy A exceed transaction costs B, policy A should be implemented”.  Under ideal situations, when property rights are well defined, and as long as transaction costs are low enough, such bargains should be made.  If they are not made, we pose two possible explanations:

1. Property rights of reform are not well defined.  Reforms imply clear political costs to key players, as well as economic costs to specific groups.  Following Olson (2000), the beneficiaries of the status quo (reform) are concentrated (diffuse) whereas its burden is diffuse (concentrated).  If the economic and political payoffs are not easily transferable between transacting parties, bargains are more difficult: how do you translate future economic payoffs into present value political compensation?

2. Lack of credible commitment devices.  A hypothetical contract, where reforms are agreed upon in exchange for some political and economical compensation, requires credible commitments, and equally important, they need to be enforceable.  In private bargains, it is easy to rely on explicit contracts and third party enforcement.  But in matters of public policy, such explicit contracts are rare, and the likely enforcer, the electorate, faces collective action problems.

In the case of Mexico, the inability of legislators to be reelected in consecutive terms, for instance, limits the time horizons of the political bargains that can credibly be made.  In the PRI era, centralized policymaking allowed for some political bargains, but they also faced limits and trade offs, which often turned into unsustainable policies.  It is possible that as political competition consolidates, some commitment devices will develop in the current PMP arenas—but such devices are not here yet.