Agency and Dynamics in Political Economy

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The political process of economic policymaking involves several principal-agent relationships, where an agent takes an action or decision on behalf of a principal, and the principal offers incentives to induce the agent to act in the principal's best interest. Most notably, there are common agencies where several principals acting non-cooperatively try to influence the choices of the agent. The process also extends through time. This requires the political actors to make choices under uncertainty. It also allows some cooperation cooperation in conflicts like prisoners' dilemmas. The proposed research builds on and applies these two broad themes to several questions of theoretical and practical interest.1. The European Central Bank - The formal constitution of the ECB is similar to that of the Bundesbank - independent and dedicated to price stability. But in practice it can be influenced by the member governments. The Germans fear that such politicization will lead to excessive inflation. It is proposed to examine this question by theoretical modeling of two aspects of politicization. The first deals with non-cooperation, so the governments act as separate principals influencing their common agent. Preliminary analysis shows that this does not cause excessive inflation if the governments can commit to their incentive schemes for the ECB. The second deals with lack of commitment. This raises the usual problem of time-consistency in monetary policy, now compounded by a prisoners' dilemma among the several governments. Preliminary analysis shows that the results of this model conform well to intuition. Further research will examine the design of the optimal sustainable tacit cooperation in this dilemma game.2. Common Agency with Informed Principals - The European governments have private information on matters of common interest when they deal with the ECB; then their incentive schemes can reveal this information to the banker, and each government faces a situation formally like that of the winner's curse in its interaction with other governments. This observation suggests the need for a more general theory of common agency with informed multiprincipals. Such a theory will also find other useful applications. Most notably it can compare and reconcile two rival views in the theory of lobbying - one view holds that lobbies make contributions to "buy" policies, and the other argues that lobbies' main function is to provide information.3. Dynamics of Political Positioning - Some parties leave their policy positions vague; others take a clear and firm stand on issue positions. It is proposed to model this as a game of irreversible choices under uncertainty about voter preferences. The conjecture is that the party currently enjoying more popularity will keep its platform vague, while smaller parties take firm positions in the hope of entrenching themselves in the vote-rich part of the political spectrum.4. Other work - This consists of extensions and modifications of recent work, and includes the following. [i] A model of lobbying where the government acts as the principal and announces its policy as a response to contributions. [ii] A model oftacit compromise among several parties to split the available economic spoils as their political support fluctuates. [iii] Explaining the credibility of government's promise to repay its debt in terms of a correlation between political power and the propensity to hold government bonds.