Principled Agents?: The Political Economy of Good Government (Lindahl Lectures on Monetary and Fiscal Policy)

279 Pages·2006·0.95 MB·English

by  Timothy Besley

Principled Agents?
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Principled Agents?
The Political Economy of Good
Government
Timothy Besley
3
3
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ISBN 0–19–927150–X 978–0–19–927150–4
10 9 8 7 6 5 4 3 2 1
Contents
Preface viii
Acknowledgements xi
1 Competingviewsofgovernment 1
1.1 Theissues 1
1.2 Thisbook 2
1.3 Background 4
1.3.1 Thesizeofgovernment 4
1.3.2 Corruption 10
1.3.3 Propertyrights 14
1.3.4 Trustandturnout 17
1.4 Economicpolicymaking 20
1.4.1 Foundations 21
1.4.2 Goodpolicies 23
1.4.3 Thepublicchoicecritiqueofwelfare
economics 25
1.5 Politicaleconomy 27
1.6 Incentivesandselectioninpolitics 36
1.7 Concludingcomments 43
2 Theanatomyofgovernmentfailure 45
2.1 Introduction 45
2.2 Threenotionsofgovernmentfailure 48
2.2.1 Paretoinefficiency 48
2.2.2 Distributionalfailures 49
2.2.3 Wicksellianfailures 52
2.2.4 Comparisons 53
2.3 Anexample:financingapublicproject 55
2.3.1 Privateprovision 56
2.3.2 Governmentprovision 57
v
Contents
2.4 Sourcesofgovernmentfailure 59
2.4.1 Ignorance 59
2.4.2 Influence 61
2.4.3 Thequalityofleadership 68
2.5 Sourcesofpoliticalfailure 70
2.5.1 Voting 71
2.5.2 Log-rollingandlegislativebehavior 74
2.6 Dynamics 77
2.6.1 Investmentlinkages 78
2.6.2 Politicalandpolicylinkages 82
2.6.3 Investmentandpolitics 89
2.7 Implications 93
2.8 Concludingcomments 97
3 Politicalagencyandaccountability 98
3.1 Introduction 98
3.2 Elementsofpoliticalagencymodels 102
3.2.1 Thenatureoftheuncertainty 103
3.2.2 Themotivesforholdingoffice 104
3.2.3 Thenatureofaccountability 105
3.2.4 Retrospectivevoting 105
3.2.5 Modeltypes 106
3.3 Thebaselinemodel 108
3.3.1 Theenvironment 108
3.3.2 Equilibrium 110
3.3.3 Implications 111
3.4 Extensions 123
3.4.1 Polarizationandcompetition 124
3.4.2 Informationandaccountability 128
3.4.3 Thenatureofthedistortion 136
3.4.4 Within-termcycles 141
3.4.5 Multipleissues 144
3.4.6 Multipletwo-periodterms 148
3.4.7 Indefiniteterms 154
3.4.8 Multipleagents 157
3.5 Discussion 165
3.5.1 Civicvirtueandthequalityof
government 165
3.5.2 Decentralizationversuscentralization 166
3.5.3 Autocracyversusdemocracy 169
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Contents
3.5.4 Accountabilitytowhom? 169
3.5.5 Wagepoliciesforpoliticians 170
3.5.6 Behavioralversusrationalchoicemodels 172
3.6 Concludingcomments 172
4 Politicalagencyandpublicfinance
(withMichaelSmart) 174
4.1 Introduction 174
4.2 Themodel 177
4.3 Threescenarios 180
4.3.1 Pureadverseselection 180
4.3.2 Puremoralhazard 182
4.3.3 Combiningmoralhazardandadverse
selection 185
4.4 Implications 188
4.4.1 Equilibriumvoterwelfare 189
4.4.2 Aregoodpoliticiansnecessarilygoodfor
voters? 191
4.4.3 Turnoverofpoliticians 193
4.4.4 Thespendingcycle 194
4.5 Restraininggovernment 195
4.5.1 Adirectrestraintonthesizeof
government 199
4.5.2 Indirectrestraints 200
4.5.3 Summary 209
4.6 Debtanddeficits 210
4.7 GovernmentsversusNGOs 214
4.7.1 Framework 216
4.7.2 Aidtothegovernment 219
4.7.3 Comparisons 220
4.7.4 Furtherissues 222
4.8 Competence 223
4.9 Conclusions 225
Appendix 226
5 FinalComments 228
References 234
Index 249
vii
Preface
ThisbookbeganlifeastheLindahlLectureswhichIdeliveredatthe
UniversityofUppsalainOctober2002.Iremainhonoredtohavebeen
asked to deliver these lectures. Erik Lindahl developed some power-
ful ideas in public economics and political economy. He represents
thespiritinwhichthisbookiswritten—usingideasinpoliticaleco-
nomyandpubliceconomicstounderstandhowtomaketheworlda
betterplace.IamparticularlygratefultoSorenBlomquistandBertil
Holmlundfortheirhospitalityduringmyvisitandtheirpatienceand
understandingforthedelayinwritinguptheseideas.Iamalsograte-
fultothefacultyandstudentsatUppsalawhomademyvisitsucha
stimulatingone.
Themainreasonforthedelayinwritingupthelectureshasbeena
creepingambitiontodevelopsomeoftheideasmoredeeplyandsys-
tematically.Forexample,itbecamecleartomethattheagencymodel
ofpoliticswaslesswellunderstoodthanIhadpreviouslythoughtand
theopportunitytodevelopamoresystematicexpositionofitspoten-
tialwastootempting.Themanuscriptalsopresentsanopportunityto
makeastatementonthedividebetweentheso-calledbenevolentdic-
tatorviewofthegovernmentandthepublicchoiceview.Havingbeen
schooled in one as a graduate student, I have since been on a jour-
neywhichhastriedtosquaremybeliefintheimportanceofsound
(andnotnecessarilyminimal)governmentwiththeself-evidentpro-
position that government office is frequently abused. It has become
cleartomethatincentivesingovernmentarefirstorderandshouldbe
taughtaspartofanycourseinpubliceconomics.Totheoriginallec-
tures,Ialsoaddedamorerefinedchapterontheideaofgovernment
failure.
Thisbookisintendedasacontributiontotheburgeoningfieldof
political economy—combining ideas from economics and political
science. I have tried to keep technicalities to a minimum. But some
familiarity with the basic tools of micro-economics is necessary to
viii
Preface
appreciatesomeofthearguments.Thecoverageisfarfromdefinitive.
Thefieldisstillevolvingfast.Thetreatmentherefocusesmainlyon
theagencyapproachtopoliticswhichtakesasymmetricinformation
inpoliticsseriously.Itpaysmuchlessattentiontospatialmodels.
I was supremely fortunate in having the opportunity to present
someoftheideasinthisbooktotheEncounterswithAuthorsseries
organizedbytheHarvardCenterforBasicResearchintheSocialSci-
ences (CBRSS). I am particularly grateful to Jim Alt and Ken Shepsle
fortheirinvitationandhospitality.Ialsobenefitedfromtheirnumer-
ous insights on this project that they offered while I was there.
Theparticipantsinthatworkshopwereextremelysupportive,giving
me countless ideas and helping me to avoid infelicities. I am espe-
cially grateful for the feedback that I received at the workshop from
DaronAcemoglu,AlbertoAlesina,AbhijitBanerjee,JohnLondregan,
Arthur (Skip) Lupia, Adam Meirowitz, Sharun Mukand, Jim Snyder,
andEnricoSpolaore.
Many people have influenced my thinking on the topics of this
book. ThroughoutmycareerIhaveenjoyedthecounseland,above
all, friendship of Steve Coate. He and I have collaborated on a large
number of projects and many ideas developed here (especially the
goodones!)areprobablyhis.However,theyhavebeenetchedintomy
mindbyyearsofdiscussionwithStevesothatInolongerrecognize
this. Anne Case collaborated with me in my first efforts in political
economy when we stumbled on the agency approach while trying
tounderstanddeterminantsofre-electionratesamongUSgovernors.
Annehastaughtmemanythingswhicharerelevanttotheideasin
thisbookandthepartofChapter3onUSgovernorsisbasedonour
joint work. Michael Smart has also collaborated with me in under-
standing the agency model in public finance settings. Chapter 4 of
thisbookreportsmostlyonjointworkwithhim.HisworkwithDaniel
Sturmalsogreatlyinfluencedtheformulationoftheagencyproblem
thatIuseinChapter3.
The LSE is a unique place and I have been privileged to serve as
a member of the economics department and of the Suntory and
Toyota International Centres for Economics and Related Disciplines
(STICERD)since1995.Ithasprovidedmewithcolleagueswhosecuri-
osity,integrity,andenergyaresecondtonone.Iespeciallythankmy
STICERD-basedcolleaguesOrianaBandiera,RobinBurgess,Maitreesh
Ghatak, Markus Goldstein, and Andrea Prat with whom I have had
ix