Bargaining With the State.

Professor Richard Epstein in his book Bargaining with the State has extended his argument for a well specified and constrained role for government made in his previous book, Takings: Private Property and the Power of Eminent Domain, to include contracting with the government. The form of the contracting with the government is not solely the purchase of resources but includes contracts that are implicitly formed by the creation of the welfare state and by the state specifying property rights. Provocative questions such as the creation of corporations, tax preferences, abortion, and unemployment and welfare benefits are all investigated within a bargaining context. The main question that the book deals with is when government engages in some activity that generates an increase in the total surplus how is that surplus to be divided between the separate economic agents?

In Part One of the book, "Theoretical Foundations: The Problem of Coercion," Professor Epstein outlines the theory that will be used to access government behavior. Significant in this section is the definition of a bargain, which occurs when a trade takes place that has some improvement in welfare in the Pareto (or Potential Pareto) sense. Epstein argues that the government should enforce bargains (protect property rights) when there are joint gains between the contracting individuals and/or when there are interests that affect any third party. In Chapter 1 the context of the issues of a bargain between the state and individual (involving "givings and takings") is developed. Chapter 2 presents an outline of the remaining chapters of the book. In Chapter 3 the baseline, the initial distribution of property rights, are discussed as these will be used for comparison purposes when analyzing state performance. Chapter 4 provides a discussion of the movements away from the initial baseline discussed in the previous chapter that are acceptable and are unacceptable. In Chapter 5 the alternative bargaining structures are discussed. These bargaining structures are important in determining the relative bargaining strength of the different economic agents. Included as bargaining structure issues are market structures such as perfect competition and monopoly, gaming activity related to the prisoner dilemma, and externalities. Chapter 6 focuses on the movement from the role of government as a definer of property rights to the governments role in the enforcement of property rights. In this chapter the "just compensation" requirement is cast as an application of the Kaldor-Hicks compensation criterion and it is argued that this may be used as a way of accessing government bargaining. In Chapter 7, the maximizing and division of any social surplus that is created by the government activity is discussed. In this chapter Professor Epstein offers his solution to the unconstitutional conditions paradox which is critical for the remainder of the book.

Parts 2 and 3 look at a broad range of economic issues related to interactions between the state and individuals. In Part 2 federalism issues are addressed. Chapter 8 is concerned with the important role the states have and the monopoly power: they wield in the incorporation of businesses. Restrictions that are often imposed on foreign owned corporations are also discussed. In Chapter 9 the use of discriminatory taxation by governments is discussed. Professor Epstein argues that the use of discriminatory taxation by government is an example of the monopoly power that governments have and should be critiqued via consideration of the unconstitutional conditions criterion. The interaction between different tiers of government is discussed in Chapter 10. An example of the use of monopoly power discussed in this section is the use of federal tax revenues to control the choices states make to ensure some outcome desired by the federal government but not necessarily by the state government.

Part 3 discusses topics related to the relationship between economic liberties and property rights. The first chapter in this section, Chapter 11, is concerned with public control over highways. It is noted that when the state is given the power to allow access to highways problems of gaming and externalities inevitably ensue. Chapter 12 is concerned with land use restrictions and the associated police power. Topics in this chapter provide a vivid example of how the government by its actions can create surpluses. The critical question then is how the surpluses will be distributed. The topic of Chapter 13 is the issuance of licenses and permits by government. Professor Epstein argues that the state should not be allowed to create a regulatory system that pulls the market away from a competitive equilibrium as any other distribution is necessarily inefficient. While not explicitly indicating this, the argument seems to be one of relying one contestable markets and the associated freedom of entry and exit to self regulate markets as a preferable approach to government exercising its monopoly powers in the granting of licenses. Chapter 14 is concerned with labor and employment contracts. One important point in this chapter is that even if the government is somewhat constrained as a regulator it may have a great deal of market power as actor. Hence whenever the government acts as a monopolist there is necessarily a reduction in the social surplus, similar as when private firms act monopolistically. Examples of government involvement in employment contracts which are discussed in this chapter include pregnancy benefits and drug testing for HIV.

The final, and the most provocative section in my view, deals with what Professor Epstein labels positive benefits which have come about due to the existence of the welfare state. In these chapters the "new rights" and their distribution which axe created by entitlement programs are discussed. In Chapter 15 the topic is tax exemptions for specific organizations. Included in the chapter discussion are newspapers and religious organizations. Professor Epstein comes to the conclusion in this chapter that because of the large and unequal distribution of benefits from tax exclusions the (second) best solution would be to limit the power of the Congress to allow for tax exemptions. Unemployment benefits are discussed in Chapter 16. Issues such as the payment of unemployment benefits for individuals who, for religious reasons, decide not to work on a particular day or for individuals who decide to strike are discussed. Welfare benefits and the constraints imposed on their receipt by the state are discussed in Chapter 17. An important point that is offered in this section is that once the state has decided to provide welfare benefits to all it is incumbent on the state to provide those in an even manner. For example, had the state just decided to not provide funds to defray the costs of live births for low income households and also decided not to provide funds for abortion then the issue of subsidizing one activity over the other would not arise. In essence Professor Epstein suggests that when the public is split on an issue, such as public funding for abortions, the best (or at least lest harmful) activity for government is for the government to remain neutral on the issue. In that way neither of the two positions are implicitly subsidized by the government activity. In effect Professor Epstein argues that the appropriate role for government in issues which carry a great deal of passion by the actors is to get out of the way and let private charities and markets deal with the issues as any stance the government is likely to take will benefit one point-of-view over the other. The final chapter is concerned with educational benefits. Three issues are discussed: abortion counseling, adolescent family planning, and public funding for the arts. In these cases, as in the public funding of abortions, Professor Epstein takes the view that the controversial nature of these issues and the implicit relative subsidies given to one group over another when the government becomes involved, suggests that perhaps the best policy is to level the playing field and minimize the government involvement.

Professor Epstein's book is well written and offers a unique blending of economic concepts and legal concepts that should be of interest to both professions. Further, I find that this book provides a wealth of information that could be discussed in industrial organization and public finance classes as a way of analyzing the role for government. In essence, what Professor Epstein has offered us is a framework for analyzing how the rules of the interaction between the government and other economic agents are set and how those rules may best be analyzed. By recognizing that the government has monopoly powers the appropriate method for analyzing when the government does and does not abuse those powers may be formulated.

Christopher B. Colburn Old Dominion University