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The political economy of indirect control

Author: Gerard Padró i Miquel; Pierre Yared; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2010.
Series: Working paper series (National Bureau of Economic Research), no. 15748.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Gerard Padró i Miquel; Pierre Yared; National Bureau of Economic Research.
OCLC Number: 526469315
Notes: "February 2010."
Title from http://www.nber.org/papers/w15748 viewed Feb. 23, 2010.
Description: 1 online resource (46 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 15748.
Responsibility: Gerard Padró i Miquel, Pierre Yared.

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.

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