The Political Economy of Indirect Control

48 Pages Posted: 22 Feb 2010 Last revised: 14 Jul 2023

See all articles by Gerard Padró i Miquel

Gerard Padró i Miquel

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Pierre Yared

Columbia University - Columbia Business School, Finance

Multiple version iconThere are 3 versions of this paper

Date Written: February 2010

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.

Suggested Citation

Padro i Miquel, Gerard and Yared, Pierre, The Political Economy of Indirect Control (February 2010). NBER Working Paper No. w15748, Available at SSRN: https://ssrn.com/abstract=1556113

Gerard Padro i Miquel (Contact Author)

London School of Economics & Political Science (LSE) ( email )

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National Bureau of Economic Research (NBER)

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Pierre Yared

Columbia University - Columbia Business School, Finance ( email )

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New York, NY 10027
United States

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