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On the Optimal Social Contract: Agency Costs of Self-Government

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  • Sang-Hyun Kim

    (University of East Anglia)

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    Abstract

    In a typical study of political economy, citizens are regarded as principals, and government as agent. This is a modern way of thinking in the sense that classical theorists of democracy such as Jean-Jacques Rousseau and James Madison were more interested in the dual nature of people; they are principals (citizens sharing the sovereign power) and, at the same time, 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 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. The 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 the citizens' demand for accountable government becomes stronger, in which case the standard principal-agent framework is good enough to describe the political reality.

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    Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Applied and Financial Economics Working Paper Series with number 059.

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    Date of creation: Feb 2014
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    Handle: RePEc:uea:aepppr:2012_59

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    1. Torsten Persson & Gerard Roland & Guido Tabellini, . "Separation of Powers and Political Accountability," Working Papers 100, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    5. Lagunoff, Roger, 2001. "A Theory of Constitutional Standards and Civil Liberty," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 109-32, January.
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    7. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "The Quality of Government," Working Paper 19452, Harvard University OpenScholar.
    8. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
    9. Acemoglu, Daron, 2005. "Politics and economics in weak and strong states," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1199-1226, October.
    10. Laffont, Jean-Jacques, 2000. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780198294245.
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