Judicial Predictability and Federal Stability

AuthorJenna Bednar
Publication Date01 Oct 2004
Jenna Bednar
Institutions structure incentive environments for strategic actors. What is the
effect of a f‌lawed institution – one that is not perfectly predictable – on strate-
gic behavior? This paper focuses on the inf‌luence of the judiciary on inter-
governmental rivalry in a federation, in particular considering how shifts in
judicial predictability affect federal opportunism. Results of the model indicate
that governments in a federation challenge one another’s behavior in court less
frequently as the judiciary grows more predictable but the effect of predict-
ability on opportunism depends upon the cost of challenging an agent.
When costs are low, increasing the predictability of the court increases oppor-
tunism, contrary to intuition. The model is extended to consider the effect of a
biased court.
KEY WORDS .federalism .game theory .institutional analysis
1. Introduction
Institutions structure incentive environments for strategic actors. What is
the effect of a f‌lawed institution – one that is not perfectly predictable – on
strategic behavior? Institutions overcome environmental uncertainty by
providing information, coordinating or constraining behavior or serving as
commitment mechanisms (e.g. Schelling, 1960, 1978; Olson, 1965; Shepsle
and Weingast, 1987; Hardin, 1989; North, 1990; Greif et al., 1994). Oppor-
tunism – when one agent uses the cover of environmental uncertainty to
take advantage of another actor – is a signif‌icant problem that institutions
can help to resolve by revealing information. One important class of institu-
tions, adjudicatory mechanisms, resolves disputes by providing an objective,
Journal of Theoretical Politics 16(4): 423–446 Copyright &2004 Sage Publications
DOI: 10.1177/0951629804046149 London, Thousand Oaks, CA and New Delhi
I am grateful to John Ferejohn, Barry Friedman, Liz Gerber, Simon Hug, Ken Kollman,
Becky Morton, Scott Page, Chuck Shipan, seminar participants at Iowa, Michigan, Princeton,
and Berkeley, and Jim Johnson and three anonymous referees for helpful suggestions.
disinterested forum for revelation of action or information. With an adjudi-
catory mechanism, agents anticipate the institution’s reaction, giving their
actions predictable consequences.
For example, Milgrom et al. (1990) describe the importance of the law
merchant to facilitate long-distance trade (see also Calvert, 1995). As
markets spread beyond neighbors, economic transactions are strained by the
new potential for opportunism since reputation – a repeated-play deterrent –
is not available with trade between strangers. The advantages of expanded
trade may be offset by the potential for uncurbed opportunism. While
Milgrom et al. model non-repeated dyadic play, the goal is to solve the
collective action problem where traders would like to punish their dishonest
members by excluding them from trade but are impeded by uncertainty
about what each trader has done in the past. The law merchant is an insti-
tution that can restore eff‌iciency by playing the role that reputation can
serve in closer quarters: the law merchant serves as a clearinghouse and
collective memory, helping the merchants decide whom to sanction. Agents
are deterred from cheating, knowing that the law merchant will reveal any
dishonest past play.
Federations, too, have a collective action dilemma that emerges from play
among subsets of its governments.
One often interchanges the word ‘federa-
tion’ with ‘union’ because federations are aggregations (or disaggregations)
of subunits that hope to take advantage of the gains from cooperation,
including trade and a common market, while recognizing politically their
distinct interests as subunits. In federations, a constitution, past judicial
decisions and public opinion combine to create a set of expectations about
government behavior. These expectations are sometimes referred to as the
‘federal bargain’ (e.g. Riker, 1964; Filippov et al., 2003) to emphasize both
the cooperative and competitive nature of the accord. The existence of a
federal bargain does not guarantee that all parties will obey it and monitoring
compliance is a problem. The dimensionality of intergovernmental relations
in federations is highly complex – to expand upon Grodzins’ (1966) timeless
metaphor, it is essentially a marbled stack of public good provision problems
glazed by an uncertain environment. When negative externalities are gener-
ated, the environmental uncertainty makes it diff‌icult to discern between
externality-generating opportunism and random negative environmental
effects. While the Law Merchant was designed to ensure that non-compliant
1. Bednar (1997) shows that with a continuous action space under uncertainty, the full
compliance equilibrium cannot be sustained. Furthermore, moderate compliance is sustained
by periodic punishment regimes – eras of non-compliance – costly to all participants. With a dis-
crete action space, full cooperation can be sustained, but as long as there is environmental uncer-
tainty, only with a f‌inite punishment regime. The objective of federal institutional design is to
induce compliance with institutions that are more eff‌icient than a punishment regime.

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