Why principals tolerate biases of inaccurate agents

Some agents are more accurate than others in estimating the best policy. The more accurately an agent estimates a policy's effects, the more he will resist biases, such as bribes from a special interest. Thus, a special interest needs to pay a larger bribe to an accurate agent than to an inaccurate agent. The accurate agent who is biased will then more likely cause harm than does an inaccurate agent who favors the special interest. Therefore, the principal may gain more from controlling biases of an accurate agent than of an inaccurate one. Thus, high ability of public officials may be associated with little corruption.     

Regulatory tune-ups

Regulators cannot continuously and perfectly monitor firms. The alternative considered here supposes the regulator sets prices at discrete, unforeseen, times. I show that when marginal cost follows a stochastic diffusion process, but the regulator only irregularly adjusts the regulated price, the optimal price may be less than or greater than the expected level of marginal costs. The regulated price should be higher the steeper the demand curve, the lower the discount rate, and the greater the variance of costs. The social benefit of changing the price following a change in marginal cost is usually greater if at the time price was set marginal cost was low.     

THE ELECTORAL COSTS OF SPECIAL INTEREST POLITICS WHEN VOTERS ARE IGNORANT*

It is widely believed that the free-rider problem and the incentives to build minimum winning coalitions cause politics to reflect the preferences of special interest groups. Nevertheless, if voters do not know all the positions of all the candidates, then a candidate who proposes policies that benefit the public at large may defeat a candidate who depends on the support of special interests. Moreover, even if the latter candidate can win, he must use a publicity strategy which allows any voter to hear of proposals that benefit groups other than the voter's.     

When a Loser Gains: Free Riding in the Innovation of Network Goods

We consider duopolists innovating and producing a good subject to network externalities. If successful in R&D, a firm sells both the old product and the new one. The new product increases the utility of its user; it also generates a higher network externality than does the old product. A firm which fails to innovate nevertheless profits from the success of the rival: the network effect raises the value of the old product it still produces. A firm free-rides on the innovative efforts of another firm, reducing the incentives of any firm to innovate.     

Credit claiming

We consider a leader and a subordinate he appoints who work in a team. The public observes the organization’s performance, but not the separate contribution of the leader or of the subordinate. The leader may therefore claim credit for the good work of his subordinate. We find conditions which induce the leader to claim credit (both truthfully and untruthfully), and the conditions which lead the leader to appoint a subordinate of low ability.JEL Classification: M5Björn Segendorff gratefully acknowledge financial support from The Swedish Council for Research in Humanities and Social Sciences (HSFR, F0357/97). We are also grateful for comments by an anonymous referee.     

Signaling,network externalities,and subsidies

A signal may be more effective the greater the number of people who use the same signal, thereby creating a network externality and potentially generating multiple equilibria. A subsidy to the signal can increase efficiency, and the signalers may benefit from the subsidy even if they pay taxes to finance it. But people who benefit from the signal may oppose too large a subsidy, because a large subsidy could destroy the signaling value.