Equilibrium and Efficiency under Pure Entitlement Systems

Abstract

An entitlement system is a political institution which accords various citizens’ rights to veto specific changes of social state. This paper concerns the performance of such institutions, in the absence of other centralized decision-making institutions. Specifically, questions relating to unbiasedness (the potential of an institution to support any Pareto-efficient social state as an equilibrium) in situations with externalities are discussed. Necessary conditions for an entitlement system to be unbiased regardless of a society's technology are found, and these conditions are shown to be sufficient when technology and preferences satisfy some geometric conditions (e.g., convexity). However, counterexamples to unbiasedness are provided when these conditions fail. It is argued that, even when an entitlement institution is unbiased, extensive information is required to verify this fact. The difficulty of systematically designing an unbiased system qualifies Hayek's assertion that such a system would be informationally efficient in operation.