Political economy, information and incentives

This paper shows how the instruments of incentive theory can be used to develop some views about the proper design of governments to avoid the capture of politicians and bureaucrats by interest groups. First, treating politicians as informed supervisors to whom economic policy is delegated we show the usefulness of the separation of powers to increase the transaction costs of collusion, the relevance of asymmetric control for avoiding reciprocal favors. The incompleteness of the constitutional contract leaves discretion to politicians who become residual decision makers. We study the trade-offs between greater efficiency obtained by allowing powerful instruments to politicians and less discretion by restricting on the contrary those instruments. Determinants of those trade-offs are the variability of the environment, the extent of asymmetric information about tastes and technologies and the size of majorities. Finally, we show the new theory of incentives for group behavior can be used to determine the transaction costs of collusion under asymmetric information and to which extent these costs relax the constraints imposed on government by collusive behavior. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: H1; D7.