Moral Hazard in High Office and the Dynamics of Aristocracy

Abstract

Both aristocratic privileges and constitutional constraints in traditional monarchies can be derived from a ruler's incentive to minimize expected costs of moral-hazard rents for high officials. We consider a dynamic moral-hazard model of governors serving a sovereign prince, who must deter them from rebellion and hidden corruption which could cause costly crises. To minimize costs, a governor's rewards for good performance should be deferred up to the maximal credit that the prince can be trusted to pay. In the long run, we find that high officials can become an entrenched aristocracy with low turnover and large claims on the ruler. Dismissals for bad performance should be randomized to avoid inciting rebellions, but the prince can profit from reselling vacant offices, and so his decisions to dismiss high officials require institutionalized monitoring. A soft budget constraint that forgives losses for low-credit governors can become efficient when costs of corruption are low.

The logic of hereditary rule: theory and evidence

“…The …ndings are broadly similar in column (4) of Table 6 where we exploit only within-region variation. 19 Does the survival of hereditary leaders depend on growth? We now test one dimension of the mechanism emphasized by the theory, namely that hereditary power is dependent on good economic performance.…”

“…The scope for doing this without facing opposition would be larger if hereditary rules also generate other bene…ts of the kind highlighted in Proposition 2. The bequest motive, represented by B would likely be higher where rents accruing to leaders are larger as in the model of Myerson (2010). If rent extraction which creates these returns is also ine¢ cient, this would weaken the value of hereditary rule.…”

“…Although we cannot be sure that this is a casual e¤ect, it is a non-trivial prediction from a theoretical model and the …nding holds up in the face of a variety of robustness checks. Moreover the logic of the argument which has been developed by Olson others, including Myerson (2008Myerson ( , 2010, has never, to our knowledge, been tested previously.…”

“…This parallels the arguments in the extensive literature on relational contracts in industrial organization (see, for example, Malcomson, 2013). In a political economy setting, Myerson (2008Myerson ( , 2010 has developed similar theoretical arguments and formalizes the notion that political leadership is held in trust with the control of moral hazard being central to good leadership. He also emphasizes the role of a selectorate in enforcing implicit "contracts"forged between citizens and leaders by controlling access to power.…”

Optimal contracts for research agents

“…Biais et al. () and Myerson () considered the dynamic moral‐hazard problem in a similar continuous‐time and Poisson framework. Our study differs from these articles as it investigates the dynamic contracting problem in a multiagent setup instead of a single‐agent environment.…”