Institutional Regulation of Public Provision

After demonstrating that institutional design based on the rational choice approach is hardly ever applicable, we suggest a procedural alternative and demonstrate its applicability with a focus on the supply side of public authorities, i.e., on the “productive state.” Whereas the former approach, based on unrealistic common knowledge assumptions, is consequentialistic, procedural fairness relies on appealing requirements of non-arbitrariness and equal treatment. In our view, game theoretic mechanism design is useful to explore the consequentialistic – e.g., welfaristic – potential but is, except for specific situations, not implementable. Compared to this, procedural fairness is in line with actually used procedures and legal traditions. Although game theoretic mechanism design can be informative, its unrealistic assumptions justify the procedural approach, which can be rigorously defined by intuitive fairness requirements.