Democratic Governance, Accountability, and Efficiency

05/23/2010

Democratic Governance, Accountability, and Efficiency

I've just ordered Dino Falaschetti's book Democratic Governance and Economic Performance: How Accountability Can Go Too Far in Politics, Law, and Business. The introduction has been posted to SSRN (download here) and is summarized by the following abstract:

Conventional wisdom warns that unaccountable political and business agents can enrich a few at the expense of many. But logically extending this wisdom implies that associated principals – voters, consumers, shareholders – will favor themselves over the greater good when ‘rules of the game’ instead create too much accountability. Democratic Governance and Economic Performance rigorously develops this hypothesis, and finds statistical evidence and case study illustrations that democratic institutions at various governance levels (e.g., federal, state, corporation) have facilitated opportunistic gains for electoral, consumer, and shareholder principals. To be sure, this conclusion does not dismiss the potential for democratic governance to productively reduce agency costs. Rather, it suggests that policy makers, lawyers, and managers can improve governance by weighing the agency benefits of increased accountability against the distributional costs of favoring principal stakeholders over more general economic opportunities. Carefully considering the fundamentals that give rise to this tradeoff should interest students and scholars working at the intersection of social science and the law, and can help professionals improve their own performance in policy, legal, and business settings.

Readers familiar with my work on director primacy know that I contend that a similar tradeoff between authority and accountability is the central problem of corporate governance. They also know that I believe the current emphasis on shareholder democracy errs too much on the side of accountability. So I suspect Falaschetti's work and mine will be relevant one to another. As I work on my new book on corporate governance after the financial crises, I suspect I'll find much useful in his work.

Posted at 06:49 PM in Books, Economic Analysis Of Law | Permalink

Comments

Conventional wisdom warns that unaccountable political and business agents can enrich a few at the expense of many. But logically extending this wisdom implies that associated principals – voters, consumers, shareholders – will favor themselves over the greater good when ‘rules of the game’ instead create too much accountability. Democratic Governance and Economic Performance rigorously develops this hypothesis, and finds statistical evidence and case study illustrations that democratic institutions at various governance levels (e.g., federal, state, corporation) have facilitated opportunistic gains for electoral, consumer, and shareholder principals. To be sure, this conclusion does not dismiss the potential for democratic governance to productively reduce agency costs. Rather, it suggests that policy makers, lawyers, and managers can improve governance by weighing the agency benefits of increased accountability against the distributional costs of favoring principal stakeholders over more general economic opportunities. Carefully considering the fundamentals that give rise to this tradeoff should interest students and scholars working at the intersection of social science and the law, and can help professionals improve their own performance in policy, legal, and business settings.