The Political Economy of Indirect Control
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.
We would like to thank Daron Acemoglu, Effi Benmelech, Carmen Beviá, Claudine Desrieux, Dennis Gromb, Mike Golosov, Johannes Horner, Narayana Kocherlakota, Gilat Levy, Robert Powell, Nancy Qian, Ronny Razin, Kjetil Storesletten, Aleh Tsyvinski, and seminar participants at INSEAD, Kellogg MEDS, Minneapolis Fed, Paris School of Economics, and the Social Determinants of Conflict Conference for comments. Gerard Padró i Miquel gratefully acknowledges financial support from ESRC under grant RES-061-250170. All remaining mistakes are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
The Quarterly Journal of Economics (2012) 127 (2): 947-1015. citation courtesy of