States and markets : a primer in political economy

The purpose of this text is to introduce concepts for studying relationships between states and markets. The economy and the state are thus analyzed as networks of relationships between principals and agents, each occupying a particular position in the institutional structure. The book then analyzes systematically the effect of the organization of the state on the functioning of the economy. It isolates the conditions that trigger government's positive or negative responses to the economy. Contents Preface 1 Introduction 1.1Decentralized allocation mechanisms 1.2 Centralized allocation mechanisms 1.3 Political-economic equilibria 1.4 Plan of the book Section I: Decentralized mechanisms 2 Market miracles and market failures 2.1 Readings 2.2 Introduction 2.3 Walrasian market 2.4 Market failures 2.4.1 Increasing returns 2.4.2 Public goods 2.4.3 Externalities 2.4.4 Are transaction costs a source of market failure? 38 2.5 Conclusion 3 Incomplete markets, imperfect information 3.1 Readings 3.2 Introduction 3.3 Causes of market incompleteness 3.3.1 Futures markets 3.3.2 Risk markets 3.3.3 Public goods and externality markets 3.3.4 Markets for future labor 3.4 Consequences of missing markets 3.5 Conclusion and some implications 4 Principal-agent framework 4.1 Readings 4.2 Introduction 4.3 Preliminaries 4.3.1 General assumptions 4.3.2 Risk postures, utility functions, and risk allocation 4.3.3 Questions to be answered 4.4 Analysis 4.4.1 Imperfect, symmetric, verifiable information 4.4.2 Asymmetric information 4.5 Conclusion Section II: Centralized mechanisms 5 The state 5.1 Readings 5.2 Introduction 5.3 Demand for coercion: Structures of interests and compliance 5.4 Forms of state 5.4.1 Objectives of rulers 5.4.2 Technologies of rent extraction 5.4.3 Technologies for replacing rulers 5.5 The structure of the state 5.5.1 Collective decision making 5.5.2 Delegation and implementation 6 Governments and private agents: Regulation 6.1 Readings 6.2 Introduction 6.3 A general model of regulation 6.4 Moral hazard of the principal 6.5 Endogenous regulation 6.6 Regulatory capture 6.7 Competing interests 6.8 Money and politics 6.9 Appendix: Optimal regulation under incomplete information 7 Politicians and bureaucrats: Oversight 7.1 Readings 7.2 Introduction 7.3 Generic problems of oversight 7.4 Political uses of public power 7.5 Checks and balances 7.5.1 Multipartisan control 7.5.2 Contramajoritarian control 7.6 Insulated bureaucracies 7.7 Conclusion: Politics and administration 8 Citizens and politicians: Representation 8.1 Readings 8.2 Introduction 8.3 A simple model of electoral accountability 8.4 Voters' control over politicians 8.5 Conclusion Section III: The state and the economy 9 Government and economic growth 9.1 Readings 9.2 Mechanics of growth 9.3 Optimal growth 9.4 Government and economic growth 9.5 Politics of economic growth 9.6 Appendix: Some steps in the Barro (1990) model 10 Government and redistribution 10.I Readings 10.2 Introduction 10.3 Preferences for equality 10.4 Positive theories of redistribution 10.4.1 Models of party competition 10.4.2 Applications to redistribution 10.5 Democracy and efficiency 11 Government and insurance 11.1 Readings 11.2 Justifications of the welfare state 11.2.1 Solidarity 11.2.2 Insurance 11.2.3 Militarism 11.2.4 Efficiency 11.3 Risk pooling and the welfare state 11.4 Endogenous provision of compulsory insurance 12 Epilog 13 Additional references Index Political economy is the study of decentralized and centralized mechanisms for allocating resources and distributing incomes: markets and states. Both markets and states can be organized and combined in a variety of ways and they jointly determine what the economy produces as well as who gets what. The purpose of this book is to introduce the reader to the concepts and tools for studying relations between states and markets. The focus is methodological. Both the economy and the state are analyzed as networks of relations between principals and agents, occupying particular places in the institutional structure. Having introduced the principal-agent framework, the book analyzes systematically the effect of the organization of the state on the functioning of the economy. The central question is under what conditions government will do what they should be doing and not do what they should not