Choosing Institutional Microfeatures: Endogenous Seniority

1. Choosing Institutional Microfeatures:Endogenous Seniority Kenneth A. Shepsle Harvard University Keynote Address Second Annual International Conference Frontiers of Political Economics Higher School of Economics and New Economics School Moscow May 29-31, 2008

2. Introduction INSTITUTIONS: • Imposition--institutional designers • Choice -- institutional players • Emergence -- historical process

3. Ubiquity of Seniority • Legislatures • Age grading • LIFO union contracts • PAYG pensions • Academic & bureaucratic grade-and-step systems

4. Previous Modeling Approaches Can an equilibrium privileging a senior cohort or generation be sustained? • Binmore’s Mother-Daughter game • Hammond’s Charity game • Cremer and Shepsle-Nalebuff on ongoing cooperation

5. Modeling the Choice of Institutions • Legislators choose a seniority system • Tribes select and sustain ceremonies and rights-of-passage between age-grades • Unions and management negotiate last-in-first-out hiring/firing rules • Social security and pension policies are political choices • Grade-and-step civil service and academic schemes are arranged or imposed

6. McKelvey-Riezman • Three subgames – institutional, legislative, electoral • Definition: A legislator is senior in period t if he or she was • a legislator during period t-1 • reelected at end of period t-1

7. McKelvey-Riezman Institutional Subgame Majority Choice: In period t shall seniority be in effect? (yea or nay)

8. McKelvey-Riezman Legislative Subgame • Baron-Ferejohn Divide-the-Dollar • Random recognition with probabilities determined by seniority choice • Take-it-or-leave-it proposal • Recognition probabilities revert to 1/N if proposal fails

9. McKelvey-Riezman Election Subgame • Voter utility monotonic in portion of the dollar delivered to district • Legislators care about perks of office (salary) and a %age of portion of dollar delivered to district • Voters reelect incumbent or elect challenger • Incumbent and challenger identical except former has legislative experience

10. McKelvey-Riezman Time Line • Decision on seniority system • Divide-the-dollar game • Election

11. McKelvey-Riezman Main Result • In institutional subgame, incumbents will always select a seniority system • In equilibrium it will have no impact on legislative subgame • Because in the election subgame it will induce voters to re-elect incumbents

12. McKelvey-Riezman Main Result: Remarks • Implication: In equilibrium all legislators are senior • Implication: Divide-the-dollar game observationally equivalent to world of no seniority. But seniority has electoral bite

13. McKelvey-Riezman Main Result: Remarks • Seniority defined as categorical (juniors and seniors) and restrictively • Recognition probability advantage to seniors only initially • In a subsequent paper they show that rational legislators would chose the “only initial” senior advantage, not “continuing” advantage

14. Muthoo-Shepsle Generalization • Seniority still categorical • But the cut-off criterion is an endogenous choice

15. Muthoo-ShepsleGeneralization: Institutional Subgame • Each legislator identified by number of terms of service, si • s = (si) state variable • Each legislator announces a cut-off, ai • The median announcement is the cut-off s* = Median {ai}

16. Muthoo-Shepsle Generalization • si > s* → i is senior • s* = 0 → no seniority system • s* > maxi si→ no seniority system

17. Muthoo-Shepsle Generalization: Basic Set Up • For cut off s*, let S be the number of seniors • 1/S > pS> 1/N – senior recognition probability (pS ranges from 1/S if only seniors are recognized to 1/N if seniors have no recognition advantage) • pS = (1 - S pS)/(N – S) – junior recognition probability • pS < pS

18. Muthoo-Shepsle Generalization: Results • Lemma (Bargaining Outcome).For any MSPE, states, and cut off s* selected in the Institutional Subgame and discount parameter δ: • If S=0 or S=N, then all legislators expect 1/N of the dollar • 0 < S < N, then the expectation of a senior (zs) and a junior (zj): zs = δ/2N + (1 – δ/2)pS zj = δ/2N + (1 – δ/2)pS • Expected payoff monotonic in recognition probabilities for each type • Lemma (Incumbency Advantage). In any MSPE voters re-elect incumbents.

19. Muthoo-Shepsle Generalization: Results Theorem (Equilibrium Cut Off).If pS is non-increasing in S and pS is non-decreasing in S, then there exists a unique MSPE outcome for any vector of tenure lengths s in which the unique equilibrium cut off, selected in the Institutional Subgame is s* = sM where sM is the median of the N tenure lengths in s. • A seniority system is chosen and the most junior senior legislator is the one with median length of service.

20. Muthoo-Shepsle Generalization: Results • Alternative seniority system? • Definition. For s any element of s, P(s) is a probability-of-initial-recognitionfunction. • Theorem (Alternative seniority system). If a legislator is restricted to announce P(s) non-decreasing in s, then he will announce 0 if s < si Pi(s) = 1/N(si) if s > si where N(si) is the number of legislators whose length of tenure is at least as high as si

21. Muthoo-Shepsle: A Summing Up • Under specified conditions the legislator with the median number of previous terms served will be pivotal • She will set the cut-off criterion at her seniority level, even if she can offer a more fully ordinal schedule • Selected categorical seniority system: most junior senior legislator has median number of previous terms of service

22. THANK YOU!