In economic theory, the study of institutions falls under the general heading of mechanism design. An institution is modeled as game in which the relevant parties interact and influence the final outcome. We study how to optimally design institutions by considering how changes in the rules of the game change the way participants interact and bring about better or worse outcomes.
But when the new leaders in Egypt sit down to design a new constitution for the country, standard mechanism design will not be much help. That’s because all of mechanism design theory is premised on the assumption that the planner has in front of him a set of feasible alternatives and he is desigining the game in order to improve society’s decision over those alternatives. So it is perfectly well suited for decisions about how much a government should spend this year on all of the projects before it. But to design a constitution is to decide on procedures that will govern decisioins over alternatives that become available only in the future, and about which today’s Constitutional Congress knows nothing.
The American Constitutional Congress implicitly decided how much the United States would invest in nuclear weapons before any of them had any idea that such a thing was possible.
Designing a constitution raises a unique set of incentive problems. A great analogy is deciding on a restaurant with a group of friends. Before you start deliberating you need to know what the options are. Each of you knows about some subset of the restaurants in town and whatever procedure the group will use to ultimately decide affects whether or not you are willing to mention some of the restaurants you know about.
Ideally you would like a procedure which encourages everyone to name all the good restaurants they know about so that the group has as wide a set of choices as possible. But you can’t just indiscriminately reward people for bringing alternatives to the table because that would only lead to a long list of mostly lousy choices.
You can only expect people to suggest good restaurants if they believe that the restaurants they suggest have a chance of being chosen. And now you have to worry about strategic behavior. If I know a good Chinese restaurant but I am not in the mood for Chinese, then how are you going to reward me for bringing it up as an option?
When we think about institutions for public decisions, we have to take into account how they impact this strategic problem. Democracy may not be the best way to decide on a restaurant. If the status quo, say the Japanese restaurant is your second-favorite, you may not suggest the Mexican restaurant for fear that it will split the vote and ultimately lead to the Moroccan restaurant, your least favorite.
Certainly such political incentives affect modern day decision-making. Would a better health-care proposal have materialized were it not for fear of what it would be turned into by the political sausage mill?