4th Lecture, STV4346B: “States and markets II”

Carl Henrik Knutsen, Department of Political Science, UiO20/11-2008

Przeworski Ch.5. Politics, coordination and degree of conflict Different structures for different political

problems: 1) Harmonious interests, pure coordination, reducing

uncertainty and finding “best” solution 2) Mixed sum games. For example Prisoners

Dilemma-structured situations. Some mutual gains exist, and coordination generates better outcome, but also distributional conflicts and incentives to deviate from cooperation

3) Pure distributional conflicts. Some win and some loose

Degree of enforcement and coercion necessary to implement solution increases from 1-3.

Does 1, 2 or 3 dominate in politics? Empirical question

Objectives of political actors No clear cut goal for political actors, like utility

from consumption in consumer theory or profits in producer theory.

“The more sociology we enter into our analysis, the better the economic apparatus works”..Optimal action is a function of constraints and objectives: a*= a*(C, U), but we only observe C. We have to make assumptions on U Contextualized assumptions necessary.

Some potential objectives Personal political power Personal wealth Personal prestige (ego rents) Social welfare Interest group welfare Ideological vision or specific policies Empirical complexity: Actor has more than

one objective, and different actors put different weights on different objectives

Types of states: a comparison Neo-patrimonial vs bureaucratic states (think

Communist) If social welfare optimizer: U =U(Y). However, political leaders might have preferences

over the amount of resources spent on public capital, G U=U(Y,G) Will no longer allocate public capital so that maximize Y.

Analysis, self-interested political leaders: Neo-patrimonial leaders will underinvest in G, because

money taken from their “personal” coffers. U’(G)<0 Bureaucratic leaders can not privately steal public funds,

but can use public capital personally without property entitlement Build large public houses for personal use, use public jets etc U’(G)>0 Will overinvest in public capital

A general, multiple-layered principal agent model of politics

Citizens:

Political principals of politicians (representation)

Economic agents of bureaucrats (regulation)

Bureaucrats:

Agents of politicians (implementation/oversight)

Principals of citizens as economic actors (regulation)

Politicians:

Agents of citizens as voters (representation)

Principals of bureaucrats (implementation/oversight)

Implications Generically impossible to ensure that the “will

of the people” is embedded in final regulation. The reasons are the inherent informational

problems in the principal-agent relations combined with personal objectives of the different agents at different stages.

Different adverse selection and moral hazard problems

“State failures” and second-best solutions: How to mitigate problems

Ch 6: Regulation Don’t worry too much about the calculations..Read

through chapter quickly. Def. regulation: “All actions by the state designed

to cause some specific actions on the part of individuals or some specific allocation of goods or services”

Regulation under uncertainty More specifically: regulates under asymmetric

information. Economic actors often have more info (about own type and effort) than bureaucrats use this info to generate “rents”.

Groups will seek to make politicians/bureaucrats regulate in their favor endogenous regulation

Regulation cont’d What if regulating agency colludes with the object

it is supposed to regulate, to capture mutually beneficial gains at the cost of wider society? (regulatory capture)

Example: Monopoly. Socially efficient regulation: set regulated price so that equals marginal cost. If asymmetric info: Monopoly lies about marginal cost-

earns extra profit..but sometimes risk that the agency finds out if uses resources to monitor

If regulatory capture: agency and monopoly collude and lie to politicians about cost, and split profit

Remedies to such problems? External monitoring, competition, comparative benchmarks, fines if detected, installation of bureaucratic norms against collusion, give rents to firms so that they reveal correct info (costly, but perhaps better than initial situation)

Money and politics 1)Does money buy policies?

Do politicians “sell” regulation to special interest groups?

2)Does money buy votes? Are voters sensitive to campaign spending, (plus

patron-client relations, a perhaps more serious phenomenon)

Campaign contributions can reflect both of the above factors: 1) make deals with politicians, 2) give money to preferred politicians for use to influence impressionable voters (politics and fluid preferences, lack of information, rational ignorance, other cognitive and emotional factors)

Ch 7. Oversight Politics, universalism and partisanship: Parties

elected by segments of population, but intended to create rules that apply for all.

Partisan control over bureaucracy: comparative differences

Crucial question: How to avoid personal use of public power/office?

Balancing features: PR and coalition government, checks and balances, contramajoritarian institutions (constitutions, rights, judiciary)

Delegation Complexity of politics, incomplete contracts and

asymmetric info Can not specify behavior precisely. What are the goals, how are tasks done, lack of

information feedback Rely on bureaucratic norms and rules rather than discretionary orders. More on this in Fukuyama.

Information advantages: If bureaucrats “behave”, they will act more efficiently than politicians higher up in the command chain. Local knowledge and specialization

What if bureaucrats do not behave? Fire alarms, citizens and NGOs. Threats of substantial punishment if “cheating” detected?

Checks and balances Potential damaging actions far worse than just shirking

on effort..Corruption, abuse of authority etc.. Institutional checks: at least one other agent that can

block actions. Benefits, but also drawbacks (rigidity)

Same goes for rule following behavior vs discretionary behavior: Larger risks with discretionary behavior, but rules can cause rigidity. Trade-off.

Rule of law: read Przeworski’s discussion. The liberal idea of constraining individual behavior in politics.

Bureaucracies or committees with agenda setting power Given Arrow/McKelvey problems, this has de facto implications for end result. Politicians with preferences close to the bureaucrats’

might choose rationally to delegate. This mechanism is even stronger if take into account that other parties might occupy power in next period.

Ch 8 Representation Why may (democratic) governments act in

people’s best interest? Self-selection of the publically spirited to politics People have at least some level of info about

politicians: vote on the good guys Retrospective voting and the threat of being

thrown out of office Checks and balances constrain negative behavior

Prospective vs retrospective voting The benefits of retrospective voting: Politicians have an incentive to

generate better outcomes for society as a whole (accountability issues)

The role of swing voters The role of sufficient information and transparency (complexity of

causal mechanisms as a problem for eliciting info) The drawbacks of lameduck sessions When voters act prospectively and vote on the politician they believe

will do best in the next period, they reduce incentives for incumbents to behave.

Links between retrospective and prospective voting: Bayesian updating: You learn about the incumbent from observing policies retrospective and prospective voting might coincide

The problem of multiple policies and few votes: My party did well on reducing unemployment but bad on the environment..What shall I do?

The role of the opposition as an information provider on the incumbents policies, but credibility issues when reporting..

Fukuyama ch2. Read through rapidly!! Central points are on these slides, or are

summed up in other parts of the curriculum General claim: No single best practices when it comes to public

administration! Contextual needs and interaction effects.. But not relativism: Range of good practices and range of bad

practices. However, no universal ordering. “Conundrum of organizational theory”: Efficiency requires

delegated discretion, but open up for control and supervision problems

Efficiency and the role of local knowledge: Friedrich von Hayek’s argument against planned economies and centralization.

The firm and institutional economics, Williamson. Factors that determine the relative efficiency of trading in markets vs within firms: Bounded rationality, complexity of transact. and incomplete

contracts Power and efficiency (specialized production and few actors), Uncertainty Organize activities within firm to reduce transaction

costs

Organizations and problems of principal-agent theory and first best solutions Unclear goals of organizations (what should or

do hospitals or schools maximize?) Lack of specificity of activity costly to

monitor or control agents reliance on informal norms as a better approach

Optimal degree of delegation is very context dependent (sector, time period, type of actor etc)

Political decentralization and local knowledge. The subsidiarity principle. But coordination problems and the question of

local administrative capacity.

Informal norms Endogenous preferences: the role of leadership,

tradition, team spirit.. Preference-shaping as powerful tool.

But decentralized shaming and praise, as well as career ladders, within the agency as powerful incentives for individuals….

What is appropriate behavior? (logic of appropriateness rather than maximization)

Low degree of specificity, low degree of clear informational feedback, lack of comparative yardsticks rules of thumb

Formal incentive structures will work best in cases where low transaction volume and high degree of specifity (central banking vs primary education)

Evans ch. 3 Bureaucratic structure and the benefits of industrial

policy. The effect of industrial policy depends on the structure of the bureaucracy and state-society relations

Read the case-descriptions in Evans yourselves, and at least a couple of them thoroughly. We will get back to some of these countries in the last part of the course

Bureaucracies Recruitment of the best and brightest The internal coherence in bureaucratic agencies The importance of a Weberian structure, the role of

norms. Self-interest and maximization without constraints as a recipe for failure.

Evans Autonomy and embeddedness:

State autonomy as ability to shape and implement own goals, and ability to solve collective problems.

But: reliance on informational feedback and the need to be embedded in society for policy to be efficient. Information and cooperation versus “capture” by social interests.

Predatory vs developmental regimes

Weber’s ideal model 1) Jurisdictional areas are clearly specified, activities

are distributed as official duties 2) Hierarchical organization: Subordinates follow

orders from superiors, but have appeal rights. 3) Relatively stable rules govern decisions and actions. 4) Personal property is separated from office property. 5) Officials are selected on basis of qualifications, and

are appointed (not elected). Meritocracy! 6) Officials are compensated by salary (should not be

too low to reduce probability of corrupt behavior). 7) Employment is a (life-long) career. Officials are

protected from arbitrary dismissal. The motivational factor of the career ladder

Evans and Rauch What is the effect from a Weberian bureaucracy-

structure on economic growth? Construct data from expert surveys, but fixed,

specific questions (Problems of endogenous scoring on open questions:

Since Singapore has produced a high growth rate, its bureaucracy must be good; lets give it a high score!!)

35 developing countries from 1970-1990 Inertia in bureaucratic structures Do not use

the time dimension Use two particular dimensions from the Weberian

model: Meritocratic recruitment and long term careers/career-ladders. Are these two dimensions correlated with other dimensions of Weber’s model? Probably.

E&R cont’d The focus on institutions and governance as

determinants of development in latter years But a need for specification of theory and better

data Weber and the bureaucracy as a tool for

growth selection of good policy/regulation stability exit patrimonialism and personal rule

Case studies that suggest the relevance of the above hypothesis: Johnson on Japan, Amsden on South Korea, Wade on Taiwan

More specific links between the two dimensions and growth Meritocracy (M) and quality of bureaucrats

better policy Career stability (CS) and regulatory stability

risk reduction for private actors CS and competence better policy M&CS esprit de corps less corruption CS longer time horizons and incentives to

behave Coherent, competent bureaucracies and

coordination abilities plus problem solving abilities

Does it really matter empirically? Yes!

Regression results