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The Political Economy of Indirect Control

Author

Listed:
  • Gerard Padró I Miquel
  • Pierre Yared

Abstract

This article characterizes optimal policy 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 repeated moral hazard 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 intensity, likelihood, and duration of intervention. The first main insight from our model is that repeated and costly equilibrium interventions are a feature of optimal policy. This is because they are the most efficient credible means for the principal of providing incentives for the agent. The second main insight is a detailed analysis of a fundamental trade-off 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 the optimal intensity, likelihood, and duration of intervention. We discuss these results in the context of some historical episodes. Copyright 2012, Oxford University Press.

Suggested Citation

  • Gerard Padró I Miquel & Pierre Yared, 2012. "The Political Economy of Indirect Control," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 947-1015.
    • Handle: RePEc:oup:qjecon:v:127:y:2012:i:2:p:947-1015
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    File URL: http://hdl.handle.net/10.1093/qje/qjs012
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    Cited by:

    1. Ambrus, Attila & Egorov, Georgy, 2017. "Delegation and nonmonetary incentives," Journal of Economic Theory, Elsevier, vol. 171(C), pages 101-135.
    2. Thiemo Fetzer & Pedro C. L. Souza & Oliver Vanden Eynde & Austin L. Wright, 2021. "Security Transitions," American Economic Review, American Economic Association, vol. 111(7), pages 2275-2308, July.
    3. Fong, Yuk-fai & Li, Jin, 2017. "Relational contracts, limited liability, and employment dynamics," Journal of Economic Theory, Elsevier, vol. 169(C), pages 270-293.
    4. Dagaev, Dmitry & Lamberova, Natalia & Sobolev, Anton, 2019. "Stability of revolutionary governments in the face of mass protest," European Journal of Political Economy, Elsevier, vol. 60(C).
    5. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    6. Christopher Clayton & Matteo Maggiori & Jesse Schreger, 2025. "The Political Economy of Geoeconomic Power," AEA Papers and Proceedings, American Economic Association, vol. 115, pages 588-592, May.
    7. Mercier, Marion & Silve, Arthur & Tremblay-Auger, Benjamin, 2023. "Building Reputation: Proxy Wars and Transnational Identities," IZA Discussion Papers 16340, Institute of Labor Economics (IZA).
    8. Georgy Egorov & Konstantin Sonin, 2014. "Incumbency Advantage in Non-Democracies," NBER Working Papers 20519, National Bureau of Economic Research, Inc.
    9. repec:osf:socarx:j8p3m_v1 is not listed on IDEAS
    10. Avidit Acharya & Robin Harding & J. Andrew Harris, 2020. "Security in the absence of a state: Traditional authority, livestock trading, and maritime piracy in northern Somalia," Journal of Theoretical Politics, , vol. 32(4), pages 497-537, October.
    11. Aguirre, Alvaro, 2016. "The risk of civil conflicts as a determinant of political institutions," European Journal of Political Economy, Elsevier, vol. 42(C), pages 36-59.
    12. Christophe Muller & Pierre Pecher, 2021. "Terrorism, Insurgency, State Repression, and Cycles of Violence," Working Papers halshs-03134347, HAL.
    13. Li, Weijia & Roland, Gérard & Xie, Yang, 2020. "Erosion of state power, corruption control, and political stability," BOFIT Discussion Papers 5/2020, Bank of Finland, Institute for Economies in Transition.
    14. Berman, Eli & Callen, Mike & Gibson, Clark C. & Long, James D. & Rezaee, Arman, 2019. "Election fairness and government legitimacy in Afghanistan," LSE Research Online Documents on Economics 102986, London School of Economics and Political Science, LSE Library.
    15. Jaeger, David A. & Klor, Esteban F. & Miaari, Sami H. & Paserman, M. Daniele, 2012. "The struggle for Palestinian hearts and minds: Violence and public opinion in the Second Intifada," Journal of Public Economics, Elsevier, vol. 96(3), pages 354-368.
    16. Marina Halac & Pierre Yared, 2022. "Instrument-Based versus Target-Based Rules," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 312-345.
    17. Michael Gibilisco, 2023. "Mowing the grass," Journal of Theoretical Politics, , vol. 35(3), pages 204-231, July.
    18. Wolitzky, Alexander, 2013. "Endogenous institutions and political extremism," Games and Economic Behavior, Elsevier, vol. 81(C), pages 86-100.
    19. Benjamin Broman, 2023. "Indirect rule and mass threat: Two paths to direct rule," Journal of Theoretical Politics, , vol. 35(3), pages 232-256, July.
    20. Merima Ali & Odd-Helge Fjeldstad & Boqian Jiang & Abdulaziz B Shifa, 2019. "Colonial Legacy, State-building and the Salience of Ethnicity in Sub-Saharan Africa," The Economic Journal, Royal Economic Society, vol. 129(619), pages 1048-1081.
    21. Chen, Shuo & Fan, Xinyu & Colin Xu, L. & Yan, Xun, 2023. "Competence-loyalty tradeoff under dominant minority rule: The case of Manchu rule, 1650-1911," Journal of Public Economics, Elsevier, vol. 220(C).
    22. Li, Weijia & Roland, Gérard & Xie, Yang, 2020. "Erosion of state power, corruption control, and political stability," BOFIT Discussion Papers 5/2020, Bank of Finland Institute for Emerging Economies (BOFIT).
    23. T. Randolph Beard & Richard Alan Seals Jr. & Michael L. Stern, 2014. "Security and Government Credibility," Auburn Economics Working Paper Series auwp2014-07, Department of Economics, Auburn University.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H1 - Public Economics - - Structure and Scope of Government

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