Working Paper: NBER ID: w15748
Authors: Gerard Padr i Miquel; Pierre Yared
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.
Keywords: Political Economy; Indirect Control; Principal-Agent Model
JEL Codes: D02; D82; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government interventions (E65) | behavior of local agents (L85) |
| Repeated and costly interventions (H84) | induce desired behavior of the agent (C92) |
| Intervention intensity (C90) | intervention duration (C41) |
| Cost of intensity decreases (E30) | use of intensity increases (R14) |
| Cost of intensity decreases (E30) | duration of intervention decreases (C41) |
| Principal's limited commitment (D29) | design of interventions (C90) |