Political Agency and Legislative Subsidies with Imperfect Monitoring

Politicians are expected to implement projects that benefit their constituents. These projects’ benefits sometimes partially accrue to interest groups and not entirely to voters. Since these projects are costly to implement, this provides an incentive for interest groups to intervene in the policy-making process by offering legislative subsidies to politicians. In addition, voters are frequently ill-equipped to scrutinise politicians’ actions and can often only imperfectly monitor them. This paper shows how these considerations interact in a stylised two-periods political agency model with moral hazard and adverse selection. I show how and when voters benefit from the existence of self-interested interest groups and of their involvement in the policy-making process. I also consider how voters monitor politicians in the presence of interest groups that might capture projects’ benefits.

Endogenous Monitoring in a Partnership Game

I consider a repeated game in which, due to imperfect monitoring, no collusion can be sustained. I add a self-interested monitor who commits to obtain private signals of firms’ actions and sends a public message. The monitor makes an offer specifying the precision of the signals obtained and the amount to be paid in return. First, with a low monitoring cost, collusive equilibria exist. Second, collusive equilibria are monitor-preferred. Third, in monitor-preferred equilibria, firms’ payoffs are decreasing in the discount factor. My model helps explain cartel agreements between self-interested parties and firms in legal industries in the United States and Europe. (JEL C73, D43, D82, L12)

Monitoring and punishment networks in an experimental common pool resource dilemma

With the aid of a lab experiment, we explored how imperfect monitoring and punishment networks impacted appropriation, punishment and beliefs in a common pool resource appropriation dilemma. We studied the differences between the complete network (with perfect monitoring and punishment, in which everyone can observe and punish everyone else) and two ‘imperfect’ networks (that systematically reduce the number of subjects who could monitor and punish others): the directed and undirected circle networks. We found that free riders were punished in all treatments, but the network topology impacted the type of punishment: the undirected circle induced more severe punishment and prosocial punishment compared to the other two networks. Both imperfect networks were more efficient because the larger punishment capacity available in the complete network elicited higher punishment amount.

Monitoring and coordination for essentiality of money

For money to be essential, environments have been considered in which there is imperfect monitoring of past actions and in which it is difficult to coordinate among economic agents. This paper provides an environment in which there is no monitoring of past actions while coordination is difficult. In this environment, we show that the first best allocation is achieved without money, and hence, money is not essential. The implication is that, for money to be essential, no monitoring is not enough but coordination must also be free.