Competition in political and economic markets

Abstract

Do anomalies play an important role in explaining economic and political choices? Are political decisions more prone to anomalies, irrationality, and inefficiency than economic decisions? In their integration of results derived from experimental psychology and applied political economy, Frey and Eichenberger (1990) argue that social scientists ought to answer these questions in the affirmative. After examining a large body of choice data, Frey and Eichenberger conclude that individuals deviate from the axioms of rational choice. In their view, the resultant "anomalies" in individual behavior are unaffected by the aggregation which occurs in the economic marketplace. They conclude that political decision-making systems correct no larger a proportion of these anomalies than are corrected by the economic market. In many institutional settings outlined in their paper, decision making systems can be expected to magnify individuals' deviations from rational behavior. System-wide irrational behavior will then produce less frequent trading and a less efficient allocation of resources. In this note we examine two components of Frey and Eichenberger's argument. First, we reconsider their evidence for irrational behavior in light of a larger body of experimental data which includes choices made in market settings. Second, we argue that competition in political markets will tend to eliminate aggregate anomalies just as it does in economic markets. Experimental economists often generate data which distinguish between choices individuals indicate in unstructured environments and transactions individuals consummate in markets. Initial statements regarding choices are often inconsistent with subsequent trading behavior. These data indicate that the economist's maximization paradigm, based on tenets of rational choice, is