4 - CREDIBLE COMMITMENT, POLITICAL INSTITUTIONS, AND SOCIAL PROTECTION

Summary

In Chapter 3, peoples' preferences for social protection were explained as a function of the level and composition of human capital assets (i.e., as a function of income and skill specificity). Any theory that seeks to understand collective choice in democratic societies must begin with an account of individual preferences. But we know from the seminal works of Arrow, Olson, North, Shepsle, and Weingast that the aggregation of preferences into public policy is anything but straightforward. Indeed, preferences may never get translated into policies, even when a single (median) voter is decisive in electoral competition.

One fundamental problem in the provision of social protection arises because current pivotal voters choose policies that yield benefits to them only at some future point in time when these same voters are no longer pivotal. This poses a problem because current voters can only commit the government for one term at a time and because there is no way to bind future voters to the policy preferences of current voters (for a similar logic, see Franzese 2002, Ch. 2). This dilemma is referred to in this chapter as the time-inconsistency problem in social policy provision, and it is shown that it can lead to serious underprovision of social protection compared to the long-term preferences of voters. This is particularly true in specific skill systems because the underlying demand for protection is higher.