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Political economy of indirect control

Padró i Miquel, Gerard and Yared, Pierre (2010) Political economy of indirect control. NBER working papers, 15748. NBER, Cambridge, USA.

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Identification Number: 15748

Abstract

This paper characterizes the efficient sequential equilibrium when a government uses indirect control to exert its authority. We develop a dynamic principal-agent model in which a principal (a government) delegates the prevention of a disturbance—such as riots, protests, terrorism, crime, or tax evasion—to an agent who has an advantage in accomplishing this task. Our setting is a standard dynamic principal-agent model with two additional features. First, the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players. Second, the principal suffers from limited commitment. Using recursive methods, we derive a fully analytical characterization of the likelihood, intensity, and duration of intervention. The first main insight from our model is that repeated and costly interventions are a feature of the efficient equilibrium. This is because they serve as a punishment to induce the agent into desired behavior. The second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal’s inability to commit. Finally, we derive sharp predictions regarding the impact of various factors on likelihood, intensity, and duration of intervention. We discuss these results in the context of some historical episodes.

Item Type: Monograph (Working Paper)
Official URL: http://www.nber.org/papers/w15748
Additional Information: © 2010 by Gerard Padró i Miquel and Pierre Yared
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, and Operations
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
H - Public Economics > H1 - Structure and Scope of Government
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 05 Apr 2011 09:50
Last Modified: 05 Apr 2011 09:50
URI: http://eprints.lse.ac.uk/id/eprint/33872

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