Charles University in Prague Faculty of Social Sciences Institute of Economic Studies Master Thesis 2003 Martin Gregor

Economics of Constitutional Games This study inquiries into the possibility of emergence of a constitutional arrangement. It concentrates both on bilateral and multilateral games resulting into a constitutional contract. For 2-person and n-person setting, the author specifies conditions under which a contract, either complete or incomplete, can be agreed upon. A simple version of a constitution is proved to arise in Section One, however this has been possible under specified conditions of credibility; therefore, two models of credibility are constructed. The solution holds but for a complete bilateral constitution. In multilateral setting, a perfectly specified constitution is unavailable unless external incentives are introduced. In Section Two, uncertainty of upcoming collective dilemmas along with homogenisation of players behind the “veil of uncertainty” are assumed to allow for an incomplete constitution to emerge. This section might explain why a constitutionally approved entity, for example the reconstitutionalised European Union, might be in the long term a welfare-enhancing device for all parties. Any incomplete contract necessarily sets limits to misuse of rights created. In Section Three the author chose division of power as an instrument improving efficiency of decision-making. In spite of additional costs imposed on decision-makers (constrained discretion, neglected in author’s model), expected benefits of division of power may override expected costs, and thus be approved by a constitutional convention. The paper takes perspective of game theory, public choice, and specifically constitutional economics in attempts to demonstrate that constitutions solving collective dilemmas (public goods, externalities etc.) have a chance to be adopted in the course of a constitutional game. By means of discretion-restraining tools, like separation of powers, constitutions also lower costs of the government operation. JEL Classification: C7, D7, H1