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The Political Economy of Indirect Control

Author

Listed:
  • Pierre Yared

    (Columbia)

  • Gerard Padro i Miquel

    (LSE)

Abstract

This paper 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 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 in the optimal contract. The first main insight from our model is that repeated and costly interventions are a feature of optimal policy. 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 the optimal likelihood, intensity, and duration of intervention. We discuss these results in the context of some historical episodes.

Suggested Citation

  • Pierre Yared & Gerard Padro i Miquel, 2010. "The Political Economy of Indirect Control," 2010 Meeting Papers 306, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:306
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. repec:eee:jetheo:v:171:y:2017:i:c:p:101-135 is not listed on IDEAS
    3. 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.
    4. Egorov, Georgy & Sonin, Konstantin, 2014. "Incumbency Advantage in Non-Democracies," CEPR Discussion Papers 10178, C.E.P.R. Discussion Papers.
    5. repec:eee:jetheo:v:169:y:2017:i:c:p:270-293 is not listed on IDEAS
    6. Wolitzky, Alexander, 2013. "Endogenous institutions and political extremism," Games and Economic Behavior, Elsevier, vol. 81(C), pages 86-100.
    7. 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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