Buchanans Contractual Theory:

Buchanan does not believe in the working of political process to achieve just distribution of income as it incorporates the involvement  of different pressure groups who try to improve their own economic position at the expense of others. 

To realize an actual  end-state, distribution of income is not sufficient; there should be redistribution of income in the society.  Buchanan distinguishes four  important factors to explain income differences: choice, luck, effort and birth.  The fourth factor 'birth' speaks about difference in endowments of people and is beyond their control.  To take care of inequity in the distribution of endowments in the form of unequal income distribution Buchanan prescribes formation of different institutions to justify the role of the state.

These three institutions are:

i) the taxation of financial intergenerational transfers,
ii) publicly financed education system and,
iii) set of rules to counteract or avert discrimination in the allocation of job opportunities.

From the beginning that is just after birth a baby faces inequity in the society based on the difference in socio-economic background  of different households or families resting on inequality of their endowments.  In this context the accumulated wealth of the past  generation acquired by the present generation in a family is also important as through inheritance the present generation becomes  rich which is not due to their earned income at present.  Therefore to maintain equity Buchanan prescribes the taxation of financial  intergenerational transfers.

Human development and human resources development both contribute for a decent living and developing human knowledge and skill.  Human development talks about the literacy, primary health and standard of living required at the minimum level for individuals in the  society.  Human resources development speaks about the comparative advantage of an individual in terms of knowledge and skilled  formation through higher education, research and development. 

Through higher learning human capability can be enhanced and it  helps for better earning.  Therefore publicly financed education system should be designed in such a manner that students belonging  to poor class must get the maximum advantage out of it through government intervention so that it moves towards the achievement of equity in the society. Buchanan favours equality in job opportunities for all based on merits.  However, for the socially  disadvantaged class he prescribes some assistance from the State which, will equip them to compete in the job market where there is  quality in the opportunity to get the job without any bias or favour.

To avoid risk Buchanan favours insurance as an institution,  which will help to relief people at the time of miseries by sanctioning compensation if they have accepted the relevant insurance  policy earlier and have cleared the dues towards the insurance premium.  Insurance as an institution helps for equity in a society  preventing individuals likely to be dragged towards poverty in consequent upon the uncertain miseries.

In all the above aspects  Buchanan justifies the role of the State directly as the producer of goods and services or as the facilitator for its provision through  intervention and contract with different private parties.