Applying economic theory, in the tradition of Laffont

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Applying economic theory, in the tradition of Laffont

  • Applying economic theory, in the tradition of Laffont

  • We should follow Jean-Jacques Laffont in using sophisticated advances in mathematical economic theory to analyze practical questions of social policy.

  • Our question: What policies in a state-building intervention can best help to rebuild the nation?

  • (taking international intervention as a given)

  • State-building: establishing a new political system, which gives power to some individuals, induces others to accept their authority.

Xenophon's ancient model of state-building

  • Xenophon's ancient model of state-building

  • The Education of Cyrus by Xenophon:

  • Cyrus apparently* loved "justice" and was the best leader to distribute booty from battles generously and in proportion to valor.

  • So Cyrus the Great founded the Persian Empire with one essential quality of leadership: a reputation for generously rewarding service.

  • (*Or maybe he loved the wealth and power from his good reputation?)

  • A theory of the state based on leadership and patronage:

  • Political organizations are established by recognized leaders who maintain reputations for reliably rewarding their supporters.

  • State-builders must develop relationships of trust with supporters,

  • in a network of patronage and power.

Failure of the state as a crisis of moral hazard

  • Failure of the state as a crisis of moral hazard

  • Moral hazard agency theory offers the key to understanding vital questions of state-building.

  • Moral hazard is the problem of creating incentives for agents to behave in a prescribed manner, when behavior is not observed.

  • People regularly rely on the state to reduce moral hazard

  • by enforcing laws and contracts.

  • A breakdown of the state creates a vast disastrous escalation

  • of moral-hazard problems throughout the nation.

  • Restoring the state: How does the state solve its own internal moral hazard problems in motivation officials to enforce the rules?

Distribution of moral-hazard rents in high offices

  • Distribution of moral-hazard rents in high offices

  • Legal and constitutional rules of government are effective only when enforced by actions of individual agents of government.

  • Powerful government agents could profit from abusing power, and so they must expect greater long-run rewards from good service.

  • Candidates would be willing to pay for such highly rewarded offices. (Becker-Stigler, J Legal Studies, 1974.)

  • Agents' rewards must depend on judgments of their superiors in the network, and so incentives ultimately depend on top leaders.

  • Promises of back-loaded rewards become a debt owed by the state, which leaders could be tempted to repudiate. (by false accusations)

  • To build a state, a leader (Cyrus) must solve this central moral hazard problem of binding himself credibly to reward past service.

  • Solution: organize top supporters in a court or council where they monitor his distribution of rewards and offices, as they serve him.

  • The leader's personal constitution: keep the courtiers' collective trust.

Building stability by national political networks

  • Building stability by national political networks

  • The political strength of a regime is in the leaders who have stakes in the regime and in the networks of supporters they can mobilize.

  • In every community, local leaders coordinate and adjudicate disputes.

  • Legitimacy: If most local leaders throughout the nation accept the regime, the rest will feel compelled to acquiesce. (coord'n game)

  • But if there are communities where the regime lacks any supporters then they can become fertile ground for insurgency.

  • Distributing power broadly, giving more local leaders a stake in the regime, strengthens it and reduces need for foreign military support.

  • But foreign support reduces national leaders' incentive to negotiate a broad inclusive distribution of power. (moral hazard in client state)

  • Karzai's centralized nonparty presidential democracy in Afghanistan. (vital mobilizing role of party privileges) (reform of governors)

  • Decentralized local democracy creates a broad class of local leaders in all communities who have a positive stake in defending the regime.

Local democracy can strengthen national competition

  • Local democracy can strengthen national competition

  • Democratic competition should limit political profits (corruption),

  • but it can fail if nobody has a reputation for good governance.

  • My QJPS ('06): In a centralized democracy, a corrupt leader may be re-elected when voters expect that challengers would be no better.

  • Successful democracy requires many alternative leaders with good reputations for serving the public (not just rewarding supporters).

  • Political decentralization creates opportunities to build such reputations, eliminating the bad equilibrium of my QJPS '06.

  • If voters expected corrupt government at all levels, a local leader who serves better could become a serious candidate for higher office.

  • Provincial and local democracy reduce barriers to political entry, by increasing opportunities for politicians to prove governing ability.

  • Decentralization can increase the national supply of individuals who have good reputations for using public resources responsibly.

  • Iraq 2003: What if Bremer gave power to elected local councils?

Resistance to political decentralization

  • Resistance to political decentralization

  • To reduce competition, national leaders have incentive to centralize, to raise barriers against political entry of new independent leaders.

  • Suppressing entry by control from top, with advancement based on loyalty to top leader. (Iron law of oligarchy of Michels, 1915)

  • A party's competitive strength depends on its local agents' efforts to win popular support. (moral hazard of local political agents)

  • Agents' incentives are stronger if promotion depends on their success in winning popular approval, as measured in local democracy.

  • Party leaders who promote the party's successful local candidates should be rewarded by a stronger and more competitive party.

  • National leaders could try to tame local governments by threatening budget reductions or administrative actions against potential rivals.

  • Scope of authority for local governments should be constitutionally protected, with clear fiscal rules determining local budgets.

  • Pakistan: local democracy intermittently; but not in Tribal Areas...

National parties can strengthen local democracy

  • National parties can strengthen local democracy

  • Successful democracies have a balance of local and national politics.

  • The rights of national parties to sponsor alternative candidates in local elections can be vital to sustaining local democracy.

  • Local bosses should know that, if they fail to give good public service, they could face challengers supported by a rival national party.

  • Democratic norms develop naturally in an elected assembly, where members share interests in protecting their rights to compete.

  • Any party must defend its candidates' rights to compete in elections, and electoral abuse by its own people can tarnish its reputation.

  • Against violent insurgents, some restrictions on nomination to local elections may be necessary.

  • But any party with some minimal fraction of the National Assembly should be able to nominate candidates in all elections in all areas.

Distributing control of public funds

  • Distributing control of public funds

  • even before a constitution

  • Bremer's theory: A constitution must come first, before any elections; central budgetary control of CPA.

  • But the fate of any new constitution must depend on leaders' prior relationships with their active supporters.

  • Our leadership-patronage theory:

  • 1. Political institutions are established by leaders with reputations for reliably distributing patronage to their supporters.

  • 2. Democracy requires an ample supply of leaders with reputations for providing good public service, while distributing patronage jobs.

  • As Cyrus distributed booty to build his reputation, politicians today build reputations by spending public funds.

  • To build a federal system, distributing funds separately to national and local governments can be as important as constitution-writing.

  • Transparent public accounting to voters is vital.

An example worth remembering

  • An example worth remembering

  • America Articles of Confederation (1776-1788) distributed power broadly to 13 locally-elected provincial assemblies.

  • Such decentralization may have often seemed inconvenient to foreign supporters of the regime.

  • Every community had at least one elected local leader with a substantial stake in the new regime, which made it unbeatable.

  • The contrast is stark with the centralized regime of Afghanistan 2004.

  • Narrow centralization might seem convenient for those at the pinnacle of power, but it increases demands on foreign supporters.



  • Gary Becker and George Stigler, "Law enforcement, malfeasance, and compensation of enforcers," Journal of Legal Studies 3:1 18 (1974).

  • L. Paul Bremer and Malcolm McConnell, My Year in Iraq: the struggle to build a future of hope (Threshold Editions, 2006).

  • James Dobbins, Seth G. Jones, Keith Crane, and Beth Cole DeGrasse, The Beginner's Guide to Nation-Building (RAND, 2007).

  • Ashraf Ghani and Clare Lockhart, Fixing Failed States (Oxford, 2008).

  • Robert Michels, Political Parties: A Sociological Study of Oligarchic Tendencies in Modern Democracy (NY: Hearst, 1915).

  • Roger Myerson, "Federalism and incentives for success of democracy," Quarterly Journal of Political Science 1(1):3-23 (2006).

  • --"The autocrat's credibility problem and foundations of the constitutional state," American Political Science Review 102:125-139 (2008).

  • --"A field manual for the cradle of civilization: theory of leadership and lessons of Iraq," Journal of Conflict Resolution 53(3):470-482 (2009).

  • --"A short overview of the fundamentals of state-building" (2009)

  • --"Local foundations for strong democracy in Pakistan" (2009)


  • U.S. Army and Marine Corps, Counterinsurgency Field Manual FM 3-24 (University of Chicago Press, 2007).

  • Xenophon, The Education of Cyrus, translated by Wayne Ambler (Cornell U Press, 2001).

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