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The Political Economy of Indirect Control

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  • 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, Oxford University Press, 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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    10. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
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    Cited by:

    1. 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.
    2. 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.
    3. Georgy Egorov & Konstantin Sonin, 2014. "Incumbency Advantage in Non-Democracies," NBER Working Papers 20519, National Bureau of Economic Research, Inc.
    4. repec:eee:jetheo:v:171:y:2017:i:c:p:101-135 is not listed on IDEAS
    5. repec:eee:jetheo:v:169:y:2017:i:c:p:270-293 is not listed on IDEAS
    6. 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.
    7. Wolitzky, Alexander, 2013. "Endogenous institutions and political extremism," Games and Economic Behavior, Elsevier, vol. 81(C), pages 86-100.

    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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