The Gains from Exchange Hypothesis of Legislative Organization

Abstract

Do rational legislators assign parliamentary rights in accordance with extremity and intensity of particularistic preferences? In numerous works in legislative studies, the gains from exchange hypothesis answers yes and asserts that such a legislative organization is politically efficient, since its outcomes give individual legislators more benefits in the policy domains they care about most. Such is the essence of logrolling. Surprisingly, no explicit and formal derivation of this hypothesis exists in the literature. This article presents and analyzes a model that embodies formally the essential features of gains from exchange as described in informal accounts: (1) different legislators receive differential benefits from distinct and particularistic policies; (2) bundles of collectively chosen policies are differentially efficient; and (3) preferences are such that there is no pure majority-rule equilibrium. Other forms of legislative organization are analyzed in an infinitely repeated noncooperative divide the dollar game. When legislators must choose from only two institutional arrangements-majority cloture and unanimous cloture-they indeed choose the gains from exchange institution, as hypothesized elsewhere. Two qualifications are significant, however. First, in contradiction of earlier informal theories, we find this result occurs for reasons unrelated to efficiency. Second, when the range of institutional arrangements is expanded only slightly, gains from exchange forms of legislative organization are not chosen and outcomes are inefficient. Students of legislatures are therefore cautioned against taking informal theories of gains from exchange at face value. The gains from exchange hypothesis of legislative organization suggests that legislative influence is allocated in accord with the extremity and intensity of legislators' preferences. It is claimed that, by adopting this principle of organization, a legislature not only avoids the unpredictability of majority rule but also allocates resources to legislators who then purchase the distributive goods that their constituents value most. On the surface, the gains from exchange hypothesis seems uncontroversial if not incontrovertible. Underneath the surface, however, lies considerable confusion about what is exchanged and what is gained.