Tyler Cowen reports on the Coasean bargain that couldn't be struck between President Bush and Saddam Hussein.
I have used this example before in lectures, so I was thrilled to see Tyler's discussion. But when I have used it, it was to highlight a basic puzzle in the political economy of transition. Gordon Tullock argued in reforming the rent-seeking society a transitional gains trap must be overcome. During the 1990s, the Polish economist Jan Winniecki provided a detailed accounting of what it would take to provide the current rent-holders of the Soviet system to take a lump sum payment equal to the present value of their future income stream from their position of power. It was not a small sum, but in many ways it was more cost effective than the efforst of reform that have plagued East and Central Europe and the former Soviet Union since 1989 and 1991.
The post-card for transitional political economy, in my mind, is --- solve the transitional grains trap in a way that consistently addresses the credible commitment problem associated with government restraint through rules.
However, we must also keep in mind that the rational choosers in the real world are human beings who are prone to allow emotions to cloud their judgment; choose among a multiplicity of agenda, some of which may in fact contradict each other; make errors in assessment; and often suffer delusions. As Lin Ostrom once put it, in political econommy we need rational choice models as if the choices were made by humans and not automatons.
But it is a good start to figure out what those automatons would do!