On the optimal social contract: Agency costs of self-government

In a typical study of political economy, citizens are regarded as the principals, and government as the agent. In contrast, classical theorists of democracy such as Jean-Jacques Rousseau and James Madison were deeply interested in the dual nature of people; they are the principals (citizens sharing the sovereign power) and, at the same time, the agents (subjects under the laws). Government, in their framework, is an intermediate body which helps people solve their self-control problem. Equipped with tools of modern economics, this paper explores the classical problem to see how economic development and political institutionalization relate to the structure of government and the quality of public sector. In particular, I consider repeated games with a large population and incomplete information, in which players decide whether to sacrifice private consumption to provide public goods. Because both people and the executive of the public projects are subject to moral hazard, the people spend resources to monitor the executive and the people themselves. The optimal self-enforcing contract, which can be interpreted as an efficiency upper bound of political systems, is characterized. An analysis of the contract shows that as a country gets more economically developed and politically institutionalized, the agency problem on the people’s side becomes negligible and that poor economic performance of a country might prevent the citizens from establishing a more efficient public sector.     

Common and Exclusive Agencies and Partial Delegation

Within the context of common agency, the article examines separationand partial delegation. The first entails breaking the multiple-taskagency into smaller single-task agencies, whereas the secondallows principals to substitute some of their efforts for theagency's. With respect to the first alternative, it is shownthat common agency can be sustained against separation by thepresence of strong complements. For the second alternative,principals partially delegate their effort and retain the rightto influence agency output at a later stage of the game. Althoughthis tends to weaken agency incentives, principals may preferthis version of common agency than one under full delegationand may prefer it to an exclusive one.     

国有企业外部人控制：—个寻租视角

国有企业的公共物品性导致国有企业蜕变为一个多重寻租网络。政府作为国有企业的外部控制人,借助政企不分、个人权力的无约束和责任体系弱化、多层委托与多重代理等体制性弊病的掩饰,与国有企业代理人合谋寻租,国有企业的"内部人控制"应运而生。可以说,国有企业若不存在"外部人控制","内部人控制"几乎不可能产生;国有企业若存在"外部人控制","内部人控制"便几乎一定会产生。"外部人控制"产生的必要前提是国有企业泛化为公共物品,而国有企业泛化为公共物品,必须具备以下条件:包括存在可供寻租的租金、存在制度性的寻租通道、存在租金和信息的传递系统。国有企业外部人控制具有极大的危害,主要表现为降低企业家的生产性努力水平和使得企业家行为寻租化。解决问题的关键在于进行产权改革,使产权得到清晰界定并得到有效保护,同时不会出现事后寻租的现象。     

Common Agency and Partial Cooperation

A modified common agency model is used to investigate the impact of partial cooperation on agent incentives. In the case where principals move simultaneously, it is shown that partial cooperation is self-defeating from the organizing principals' perspective despite a strengthening of agent incentives and effort. In the second scenario, where the organizing principals have a first-mover advantage, it is demonstrated that not only are individual cooperating principals better off but the outcome in terms of agent incentives and effort is constrained Pareto efficient. This latter scenario illustrates the possibility that partial cooperation, when coupled with a strategic advantage, improves efficiency.     

Negotiation and take it or leave it in common agency

This paper contrasts models of common agency in which principals compete in incentive contracts (that is, they make take it or leave it offers) with models where principals offer agents menus of incentive contracts from which the final contract is negotiated. It is shown that pure strategy equilibria in incentive contracts are robust to the possibility that principals might offer menus. In addition, a no-externalities condition is given such that any pure strategy equilibrium allocation with menus can be supported with competition in incentive contracts. The no-externalities condition is restrictive, but it is shown that it applies in most well-known common agency problems, including, for example, the Bertrand pricing problem.     

Efficient moral hazard

This paper presents an infinite-horizon, discounted dynamic programming model of the endogenous opportunity costs of an agent’s effort that is allocated among an endogenous number of principals. An agent allocates effort between evaluating new principals and attending to current principals. Since each principal’s return is not maximized by the agent’s optimal allocation, moral hazard occurs in equilibrium. However, since the agent maximizes the total expected value of all undertaken projects, the agent’s allocation of effort is efficient. If the agent chooses a single principal, then moral hazard does not occur and the allocation is efficient. These results are contrary to the inefficient moral hazard results in bilateral principal-agent (P-A) and common agency (C-A) models.     

Existence of equilibrium and stratification in local and hierarchical Tiebout economies with property taxes and voting

Summary. This paper present the first fully closed general equilibrium model of hierarchical and local public goods economies with the following features: (i) multiple agent types who are endowed with both some amount of private good (income) and a house, who are mobile between houses and jurisdictions, and who vote in local and national elections; (ii) multiple communities that finance a local public good through property taxes which are set in accordance with absolute majority rule; and (iii) a national government that produces a national public good financed through an income tax whose level is determined through majority rule voting. In contrast to previous models, no overly restrictive assumptions on preferences and technologies are required to prove the existence of an equilibrium in the presence of property taxation and voting. Thus, the existence of an equilibrium is proved without any of the major restrictions used in the past, and sufficient conditons for stratification of agents into communities based on their public good preferences and their wealth levels are found. This model lays the groundwork for a positive applied analysis of local public finance and intergovernmental relations. It furthermore builds the foundation for the first parameterized computable general equilibrium model of local public goods and fiscal federalism. Received: February 1, 1996; revised version August 9, 1996     

Delegation and Threat in Bargaining

Two principals (“nations”) appoint one agent each to bargain over the provision of a public good. Two institutional set-ups are studied, each with a different level of authority given to the agents. Here authority means the right to decide the own side's provision if negotiations break down. In equilibrium the principals choose agents with preferences differing from their own. The low-authority equilibrium Pareto dominates (with regard to the principals) the case of the principals deciding on the provisions simultaneously (autarchy). The high-authority equilibrium is Pareto dominated by the low-authority equilibrium and it may even be dominated by autarchy.Journal of Economic LiteratureClassification Numbers: C71, and C72.     

Trading with a common agent under complete information: A characterization of Nash equilibria

We analyze an abstract model of trading where N principals submit quantity-payment schedules that describe the contracts they offer to an agent, and the agent then chooses how much to trade with every principal. This represents a special class of common agency games with complete information. We study all the subgame perfect Nash equilibria of these games, not only truthful ones, providing a complete characterization of equilibrium payoffs. In particular, we show that the equilibrium that is Pareto-dominant for the principals is not truthful when there are more than two of them. We also provide a partial characterization of equilibrium strategies.     

Playing monopoly in the creek: Imperfect competition, development, and in-stream flows

Land ownership and control of development in new and frontier cities is often concentrated. Local public goods, such as wetlands and riparian habitats, can be adversely affected by development. Regulatory pressure to protect these local public goods may not emerge until after some development has occurred. When development rights are insecure, an incentive exists to accelerate early development, an incentive that increases with the number of firms. Further, multiple equilibria may exist, which can result in large increases in development for small increases in the number of firms. When firms are uncertain about how the regulator values the local public good, development may be further accelerated and there may be even more equilibria.     

Auction prices, market share, and a common agent

The primary pro-competitive justification for multiple principals to hire a common bidding agent is efficiency. The efficiency gained by doing so increases the advantage of the common bidding agent. Almost common value auction theory predicts that an advantaged bidder is able to reduce competition by credibly enhancing the ‘winner's curse’ of disadvantaged rivals. The credible threat results in disadvantaged rivals exiting the bidding process early, leaving the advantaged bidder to purchase most, if not all, units at lower prices than when rivals have common values. The results of our empirical study of a common bidding agent are consistent with this theory.     

Public goods,voting, and growth

We study a parametric politico‐economic model of economic growth with productive public goods and public consumption goods. The provision of public goods is funded by a proportional tax. Agents are heterogeneous in their initial capital endowments, discount factors, and the relative weights of public consumption in overall private utility. They vote on the shares of public goods in gross domestic products (GDP). We propose a definition of voting equilibrium, prove the existence and provide a characterization of voting equilibria, and obtain a closed‐form solution for the voting outcomes. Also we introduce a “fictitious” representative agent and interpret the outcome of voting as a choice made by a central planner for his benefit. Finally, we undertake comparative static analysis of the shares of public goods in GDP and of the rate of balanced growth with respect to the discount factors and the preferences for public consumption. The results of this analysis suggest that the representative‐agent version of our model is capable of capturing the interaction between many voting heterogeneous agents only if the heterogeneity is one‐dimensional.     

Local Residential Sorting and Public Goods Provision: A Classroom Demonstration

This classroom exercise illustrates the Tiebout (1956) hypothesis that residential sorting across multiple jurisdictions leads to a more efficient allocation of local public goods. The exercise places students with heterogeneous preferences over a public good into a single classroom community. A simple voting mechanism determines the level of public good provision in the community. Next, the classroom is divided in two, and students may choose to move between the two smaller communities, sorting themselves according to their preferences for public goods. The exercise places cost on movement at first, then allows for costless sorting. Students have the opportunity to observe how social welfare rises through successive rounds of the exercise, as sorting becomes more complete. They may also observe how immobile individuals can become worse off because of incomplete sorting when the Tiebout assumptions do not hold perfectly.     

On the Private Provision of Intertemporal Public Goods with Stock Effects

The provision of public goods is often hindered by a lack of powerful institutions that can sanction free riders or otherwise enforce private contributions to the public good. The simple deposit based solution introduced by Gerber and Wichardt (J Public Econ 93:429–439, 2009) solves this problem, but may require prohibitively large deposits, in particular in the context of intertemporal public goods. In this paper, we propose a modification of the deposit solution that relies only on comparably small deposits. The proposed modification improves the applicability of the procedure, most notably as it also allows to reduce deposits in static public goods problem by transforming them into dynamic ones with small per period contributions.     

Coups,revolutions and efficient policies in autocracies

The purpose of this paper is to explore the interaction of two mechanisms that might constrain the power of dictators: the threat of a coup by the selectorate and a revolution by citizens. Our results help explain a stylized fact, namely that autocracies are far more likely to be either the best or the worst performers in terms of growth and public goods policies. To this end, we focus on accountability within dictatorships using a model where both the selectorate and the citizens are the principals and the autocrat is the agent. Our results highlight that both excessively strong and excessively weak dictators lead to poor economic performances, and that a balanced distribution of de facto political power is required to incentivize the dictator to choose efficient economic policies.     

Hidden information,bargaining power,and efficiency: an experiment

We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.     

Chores

We analyze situations where the provision of each of c public goods must be voluntarily assumed by exactly one of n private agents in the absence of transfer schemes or binding contracts. We model this problem as a complete information, potentially infinite horizon game where n agents simultaneously wage c wars of attrition. Providing a public good commits an agent not to take on the provision of another public good for a fixed period. We explore the strategic trade-offs that this commitment ability and the multiplicity of tasks provide. Subgame perfect equilibria (SPEs) are characterized completely for games with two agents and two public goods. For games with two identical agents and c > 1 identical public goods, we establish that an equilibrium that yields a surplus-maximizing outcome always exists and we provide sufficient conditions under which it is the unique equilibrium outcome. We show that under mild conditions, the surplus-maximizing SPE is the unique symmetric SPE. Journal of Economic Literature Classification Number: H41, C72, D13.     

THE CARE AND HANDLING OF MONETARY AUTHORITIES*

Sometimes a group of people want to hire some agent (a monetary authority, for instance) to force them to cooperate with one another. This can cause problems, not only of the standard principal-agent type, but also of inconsistency, which appears here as renegotiation. The group faces a conflict between controlling the agent – the agency problem – and controlling themselves – the inconsistency problem. Terms of office are a good way to resolve this problem, and in fact, for people patient enough, the renegotiation problem disappears. This model provides insights into why the public dislikes inflation, why the market for presidents does not clear in Walrasian fashion, and why the controversy about “rules versus discretion” provides no policy guidance.     

ECONOMIES WITH PUBLIC PROJECTS: EFFICIENCY AND DECENTRALIZATION*

The article deals with the two fundamental theorems of welfare economics for production economies with a finite set of agents, infinitely many private goods, and a set of public projects. The problem of efficiency and decentralization is addressed under the following very general assumptions: (a) the commodity–price duality is endowed with a consistent locally convex topology; (b) the set of public projects is without any mathematical structure. Moreover, any agent is characterized by a nonordered preference relation depending on consumption goods and public projects. Approximate and exact welfare theorems are discussed throughout the article.     

Birth,death and public good provision

We explore the effect of fixed versus dynamic group membership on public good provision. In a novel experimental design, we modify the traditional voluntary contribution mechanism (VCM) by periodically replacing old members of a group with new members over time. Under this dynamic, overlapping generations matching protocol we find that average contributions experience significantly less decay over time relative to a traditional VCM environment with fixed group membership and a common termination date. These findings suggest that the traditional pattern of contribution and decay seen in many public goods experiments may not accurately reflect behavior in groups with changing membership, as is the case in many real-world environments.