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D-Incentives and Political Economy

D-Incentives and Political Economy

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Published by Tri Cahyono

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Published by: Tri Cahyono on Jan 24, 2011
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Contents
1 Introduction 9
1.1 Political Economy with a Benevolent Monarch . . . . . . . . . . . . . . . . 91.2 The Design of Democratic Institutions . . . . . . . . . . . . . . . . . . . . 101.3 About Political Economy in Democratic Countries . . . . . . . . . . . . . . 121.4 The Chicago View of Interest Group Politics . . . . . . . . . . . . . . . . . 121.5 The Complete Contracting Approach . . . . . . . . . . . . . . . . . . . . . 151.6 The Incomplete Contracting Approach . . . . . . . . . . . . . . . . . . . . 161.7 Adding Asymmetric Information . . . . . . . . . . . . . . . . . . . . . . . . 171.8 Endogenous Coalition Formation . . . . . . . . . . . . . . . . . . . . . . . 17
I Politicians as Informed Supervisors 19
2 The Complete Contract Approach 23
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232.2 A Simple Supervision Model . . . . . . . . . . . . . . . . . . . . . . . . . . 262.2.1 The Optimal Constitution Without Supervision . . . . . . . . . . . 272.2.2 The Supervision Technology . . . . . . . . . . . . . . . . . . . . . . 302.3 Optimal Incentives for the Politician . . . . . . . . . . . . . . . . . . . . . 332.3.1 Optimal Collusion-Proof Constitution . . . . . . . . . . . . . . . . . 332.3.2 Equilibrium Collusion . . . . . . . . . . . . . . . . . . . . . . . . . 362.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3 An Incentive Theory of the Separation of Powers 45
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453.2 Separation of Powers and Yardstick Competition . . . . . . . . . . . . . . . 463.3 A Model with Three Types . . . . . . . . . . . . . . . . . . . . . . . . . . . 503.4 Single Non Benevolent Politician . . . . . . . . . . . . . . . . . . . . . . . 533.5 Separation of Politicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553.5.1 Collusion-Proofness Constraints . . . . . . . . . . . . . . . . . . . . 553.5.2 Optimal Constitution under Separation . . . . . . . . . . . . . . . . 553.5.3 Comparative Statics: Rent and Welfare . . . . . . . . . . . . . . . . 563.6 Generalization of the Results . . . . . . . . . . . . . . . . . . . . . . . . . . 583.6.1 Prudent Behavior and Various Preferences . . . . . . . . . . . . . . 583.6.2 Discriminatory Side-Contracting O¤ers . . . . . . . . . . . . . . . . 593.6.3 Collusion Between the Politicians . . . . . . . . . . . . . . . . . . . 603
 
4
CONTENTS 
3.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4 Checks and Balances 65
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674.3 Optimal Symmetric Constitution . . . . . . . . . . . . . . . . . . . . . . . 694.4 Supervision and Division of Tasks . . . . . . . . . . . . . . . . . . . . . . . 734.5 Multidimensional Collusion Activities . . . . . . . . . . . . . . . . . . . . . 744.6 A Model with Three Politicians . . . . . . . . . . . . . . . . . . . . . . . . 774.7 Optimal Supervisory Structures . . . . . . . . . . . . . . . . . . . . . . . . 794.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
II Flexibility Versus Discretion in Constitutional Design 85
5 Political Economy and Industrial Policy 89
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 895.2 Political Interference in the Rent-ciency Trade-O¤ . . . . . . . . . . . . 915.3 Ownership Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935.4 Incentives against Capture as a Constitutional Rule . . . . . . . . . . . . . 955.5 Political Price Discrimination Versus Uniform Pricing . . . . . . . . . . . . 975.6 Information Asymmetries, Costly Redistribution . . . . . . . . . . . . . . . 995.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
6 Political Economy and the Marginal Cost Pricing Controversy 113
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1136.2 The Marginal Cost Pricing Rule . . . . . . . . . . . . . . . . . . . . . . . . 1166.3 Frischs Comment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1186.4 Smith, Edgeworth, Hotelling . . . . . . . . . . . . . . . . . . . . . . . . . . 1206.5 Project Selection and Pricing Rules . . . . . . . . . . . . . . . . . . . . . . 1276.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
7 Environmental Incentive Regulation 135
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1357.2 The Basic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1377.3 Controlling the Discriminatory Power . . . . . . . . . . . . . . . . . . . . . 1387.4 Delegating Discriminatory Power to the Politicians . . . . . . . . . . . . . 1447.5 Multiple Privately Informed Interest Groups . . . . . . . . . . . . . . . . . 1457.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
III Coalition Formation and Constitutional Design 155
8 Optimal Constitutional Response 159
8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1598.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1618.3 Modeling Collusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

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