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November 13, 2012Mccubbins, “Admin. Procedures as Instruments of Political ControlNielson & Tierney, “IOs, Agency Theory and WB Reform”Principal-Agent ProblemPrincipal: authority, delegates tasks to agent, have resourcesAgent: subordinate, expertise, more timeProblems:1) Desires and preferences of principal and agent may not be aligned2) Agents can hide information and/or actionsSolutions1) Incentives  contractingPositive: rewards, monetary compensation, bonusNegative: sanctions, fines, extra dutiesProblems:Agent can still hide information and/or actions; principal still does not have perfect informationContracts are never perfect2) Monitoring (overseeing, supervising)i.e. Security cameras, auditsCostly  money, timeCosts of reducing slippage has to be traded off by what the slippage could beSettle for less than 100% of perfect quality workExamples1) Congress & AgenciesA) Principals: Congress and President (sometimes)B) Agents: bureaucratic agenciesC) Concerns:Agencies create laws that do not benefit the publicUnelected officials are not affected by public’s opinionHidden information and actions  “runaway bureaucracy”Either do nothing (shirk) or are zealots for regulation (over-regulate)D) To control agents:1) Oversighti.e. Audits, Congressional hearingsProblems:Actions are reactionary (the bad event already occurred)Fire-alarm monitoring = interested parties alert authorities when there is a problemCostly  could be using time for more productive purposesPolice patrols = active oversight2) Administrative procedures: guidelines that agencies must follow when executing policies (pgs. 257-258)Makes agencies responsive to interested parties and decreases information problemElected officials can now put the oversight on auto-pilotMaintains coalition  creating procedures that are responsive to public2) International Organizations (IOs)A) Principal(s): member countries of IOsMultiple principals = problematic bc becomes confusing for agent when each principal has its own preferences  can send conflicting messages to agent (who already has his own preferences)B) Agents: IOs (i.e. UN, WTO, World Bank)C) Concerns:IO acts contrary to the preferences of multiple principalsGetting principals to agree (collective action problem)Proximity to agent determines amount of controlThe closer to agent, the more control over agentD) To control agents:Cut funding (sanctions)Screen and select employees of IOsNovember 20, 2012General Credible CommitmentsNoorudin, “Coalition PoliticsWhy Commitments May Not Be CredibleCheap talk: you can say whatever you want, but unless there is enforcement, or cost behind the promise, it may not be fulfilledTime-inconsistent preferences: long-term incentives might be undermined by short-term incentivesBoth parties can have incentives to commit to the long-term promise, but the short-term incentive might be to cheatOnce situation changes, preferences changei.e. New Years Resolutions— we make long-term goals for self-improvement, but they usually do not last very long because short-term preferences get in the wayUse commitment devices to ensure they are fulfilledGovernments & InvestmentsInvestors want low taxes, low levels of regulation, minimal oversightDo not want policies to be rapidly and frequently changingPoliticians’ preferences change bc of circumstancesi.e. Bush promised he would not raise taxes during his presidency  recession  taxes increasedPoliticians can flat out lieFrequent overturn of leadership (especially in democracies)  those who made previous commitments leave office  try to set long-term policy while they are in office (renegotiation-proof)Overcome Commitment Problems1) DelegateHand over enforcement of commitment to a third party who does not share the preferences of those involvedi.e. Impartial courtsProblems for governments bc many times the govn’t is the third party enforcerA state strong enough to enforce is also strong enough to violatei.e. Independent central bank (no political ties)  helps maintain a stable rate of inflationi.e. Independent judiciary  convinces citizens that rights will be protectedDifficult at the international level2) Reputationi.e. Companies strive to maintain a good reputation to keep customersi.e. Politicians who are the worst at breaking promises will be unpopular with constituentsPoliticians face audience costs3) Make reversal difficult or impossibleBurn bridges behind you, burn your ships, cut off your exitCut communicationInstitutional ConstraintsBy virtue of how policies are made, policies can be more or less credible1) Checks and balancesi.e. Veto points2) Coalition governments (multiparty system)One party is big enough to form the governmentMinority party: party runs the govn’t without being the majorityIn Coalition govn’ts and minority party govn’ts, another party has to also sign the billPartisan veto: moderates policy; makes it difficult to pass laws; laws that are past are very moderate3) GridlockGovn’ts with gridlock, coalition govn’ts are more attractive to investors bc the rules may not change very muchNovember 6, 2012Akerlo, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”Wheelan, “Economics of Information”Information & MarketsNo such things as perfect informationThere are barriers to information (i.e. trustworthy business partners?)Information Problem Example — Market for “Lemons”Seller knows more than buyer about product or serviceNew vs. used cars and good vs. bad cars (“lemons”)Good and bad cars are priced the same  sellers want to sell the bad cars for as much as the good carsCustomers cannot distinguish good cars from bad cars because priced the sameIncentive to sell good car decreases  sellers of good cars leave the market  market left with lemons  consumers assume that all cars left are lemons and no one wants to buy  market potentially collapsesMarkets fundamentally depend on good information  otherwise collapsesInformation AsymmetryThe core of the information problem1) Adverse selection (problem of hidden information before transaction)i.e. Insurance  the people buying it are those who are more prone to illness (the type that insurance companies do not want)i.e. Hope Scholarship  only attracts low income people  unsustainablei.e. Banking  credit reportsi.e. Physicians and mechanics  consumers are concerned that the procedures/parts recommended are those that

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FSU CPO 3930r - Principal-Agent Problem

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