"Incomplete Social Contracts"
©
Journal of the European Economic Association,
2003
Volume: 1
|
Pages: 38-67
Publication type: Journal article
Research Archive Topic: Capital Markets and Investments, Corporate Finance
Abstract
There is a long normative 'Social Contract' tradition that attempts to characterize ex-post income in equalities that are agreeable to all 'behind a veil of ignorance.' This paper takes a similar normative approach to characterize social decision-making procedures. It is shown that quite generally some form of majority- voting is preferred to unanimity 'behind a veil of ignorance' whenever society faces dead weight costs in making compensating transfers. Deviations from unanimity(or ex-post Pareto optimality) are ex-ante effcient to the extent that they economize on costly compensating transfers. Put another way, the optimal decision rule trades off the benefits of minority protection and those from greater exibility.
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