Week 7: Principals and Agents: Extensions and Applications

Question 1

multiple tasks example: standardized testing

Answer 1

the purpose of testing is to reduce noise, but testing can also be a new task by itself.

Example: teaching to the test with NCLB OR WORSE - cheating by teachers/admins

Question 2

common agency: conflict of interest example

Answer 2

US fed govt restricts personal gifts to members of Congress and exec.

Congressman can’t become congressional lobbyist for 1-2 years after leaving.

Question 3

reputational incentives example

Answer 3

Brazilian conditional cash transfer program. Worked well when politicians running for reelection, but then didn’t work in 2nd terms (didn’t care)

Question 4

recruitment and promotion

Answer 4

Outside recruitment reduces return to sabotage. (1) Productive effort is useful for internal candidates against ext and int competition. (2) sabotage only works against int competition. (3) external recruiting reduces sabotage more than productive effort

Question 5

Bandiera field experiment at UK fruit farm:

Answer 5

productivity under relative compensation vs piece rates.

“surprise” switch from relative to piece rates increased productivity over 50%.
experience increases productivity. collusion reduces productivity under relative compensation. new arrivals temporarily disrupt collusion.

Question 6

influence activities

Answer 6

lobbying

examples: inflate a report about an agent’s resource needs. impose costs (e.g. time) on both players

Question 7

Wilson Matrix

Answer 7

interest groups - concentrated and diffuse support and opposition.

interest group
entrepreneurial
client
majoritarian

Question 8

regulatory capture

Answer 8

agency regulating a client becomes advocate for client.

asymmetry of interest groups, assymetric info provision, legislation, career paths, confluence of objectives

example: Civil Aeronautics Board

Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.