T C A Srinivasa-Raghavan: The bigger they come...

OKONOMOS/ It is large legislatures, not coalitions that are bad for good economics

Last week, this column had pointed out that the Left's main contribution had been to enlarge the definition of public goods in India by creating a class of quasi-public goods such as electricity, water for irrigation, transport "" and, now, thanks to Manmohan Singh, P Chidambaram and Mani Shankar Aiyar, oil as well.

Basically, as a result of this expansion, the inability to pay the market price for these things has ceased to be a bar to their consumption. The state pays "" as it has done by reducing customs duties on oil in order to keep the increase in the price of petroleum products to a minimum.

India is not unique in this, of course. All democracies do it. But India is different.

Here the list of these quasi-public goods becomes longer by the day, perhaps in proportion to the increase in the number of voters. Some data-crazed economist should run a regression or something to check this out.

But what effects does such an enlargement have? Several, naturally, and one of them has been analysed by Oliver Koppel of the Center for Public Economics, University of Cologne.

In a recent paper*, he argues that "enlargements induce two countervailing effects in the legislature's ability to yield efficient outcomes and cooperation necessarily breaks down in large legislatures".

In a tidy little mathematical model, Koppel finds that "efficient public good provision is most sustainable in small legislatures" but that it always breaks down in large legislatures. It would be interesting, therefore, to find out if in India the smaller states subsidise less than the larger ones.

Montek Singh Ahluwalia, who has just become the deputy chairman of the Planning Commission, and who wrote an admirably comprehensive paper on state finances, when he was there last, could add an appendix to the original.

There are other things to check out as well, and I just can't stop quoting. "These inefficiencies," says Koppel, stem from the dominant effects legislature enlargements induce on the payoffs."

In other words, when large legislatures try to subsidise everything to keep different voter groups, they end up making a complete hash of everything. As those who have to pay for this, we know this to our cost.

The key driver is what Koppel calls "the fear of being excluded from legislative benefits." MPs and MLAs, therefore, follow the principle of "cooperative benefit distribution."

The point of equilibrium is hard to predict and the only thing that is certain is that the "pursuit of narrow self-interest is the only equilibrium prediction." In other words, the only thing you can be sure of "" as even the revered Doctor has just shown "" is that a politician will do everything to keep the voter happy.

Well, all right then, but what happens if at least some of the additional cost of expanding the list of public goods is paid for by some additional taxation? Great, says Koppel, if you can manage to do that, but you will still be left with a problem: who pays for whom and how much?

The answer depends critically on the agenda setter. His region receives more public goods than the rest. Bihar and Uttar Pradesh set the agendas and we know what happens as result.

The critical point here is that if, say, Mulayam or Mayawati or Laloo were to pay for all this from their states' own tax revenues, they would be dead in the water. Koppel's model, I would suggest, predicts that agenda setters will always prefer coalitions so that they can spread the burden around.

To quote once again, "An agenda setter could therefore allocate some additional tax revenue to increase (the subsidy) without losing support. His or her payoffs therefore increase monotonically and unboundedly whereas others' payoff sizes are fixed."

This was precisely what Chandra Babu Naidu had complained about when the new Finance Commission had been announced. He had then gone on to squeeze the Centre for more grants.

So, at the end of it, what? Just this (you can call it TCA's lemma): It is large legislatures, not coalitions that are bad for good economics because the larger the legislature, the bigger the number of fellows (or groups) that have to be kept happy. The more you do that, the worse your economics becomes.

That is why Chinese economics is so good. There are no legislators who have to be pleased.

*Public good provision in legislatures: The dynamics of enlargements, Center for Public Economics, University of Cologne, 2003