The Optimal Bargain between the Elite and the Majority: Party and Managerial Ideologies as Devices to Control Politicians and Managers

Abstract

We investigate problems that arise in aligning office-seeking politicians with social welfare in situations where society (or the firm) is composed of groups of different sizes with different preferences. Similar alignment issues arise in corporations where management must respond to the demands of multiple constituencies. The problems arise because the agents have a suboptimal incentive to cater to majority preferences in situations with low participation costs and to elite minority preferences in situations with high participation costs. Our paper is mainly devoted to democratic politics, in which there is no group of residual claimants who are aligned to social welfare. In democratic politics, we claim that an efficient elite-majority bargain involves the creation of competing party ideologies that serve to check opportunism by majorities in low participation-cost scenarios and by elites in high participation-cost scenarios, and in doing so align politicians with social welfare. We suggest that in non-profit firms that also lack a residual claimant, an efficient elite-majority bargain involves a parallel creation of managerial ideologies, and that such managerial ideologies may also have utility in the for-profit firm as a supplementary device to foster alignment with firm value.