Incentives and Political Economy

Incentives and Political Economy

Incentives and Political Economy

Incentives and Political Economy


Laffont here constructs a normative approach to constitutional design using recent developments in contract theory. He treats political economy as the study of the incentive problems created by the delegation of economic policy to self-interested politicians. Treating politicians successively as informed supervisors or residual decision-makers, he characterizes the optimal constitutional responses to the activities of interest groups in various circumstances, as well as the optimal trade-off between flexibility of decision-making and discretion to pursue personal agendas.


This book develops the material I used to give the 1997 Clarendon Lectures. I am very grateful to the Economics Department of Oxford University and the Oxford University Press for their invitation to deliver the lectures and for their wonderful hospitality during my visit.

The lectures correspond to an attempt to use principal- agent models and their developments for understanding constitutional design. I view political economy as arising from the need to delegate economic policy to politicians and therefore fundamentally as an incentive problem.

Accordingly this book owes a lot to the many colleagues who helped me over the years to understand the beauty of incentive theory, in particular Jerry Green, Roger Guesnerie, Eric Maskin, Jean-Charles Rochet and Jean Tirole. It draws heavily upon joint work with Marcel Boyer, Antoine Faure-Grimaud, Mathieu Meleu, Tchétché N'Guessan, Jean Tirole and in particular David Martimort. I am grateful to Isabelle Brocas, Avinash Dixit and Yossi Spiegel for their comments on a previous draft. Special thanks are due to Marie-Pierre Boé who has dealt with this manuscript so cheerfully and so professionally.

I would like to make clear at the outset that this book does not claim to provide a comprehensive view of political economy. It only explores some incentive issues raised by the delegation to politicians of various social decisions. Also, it proceeds step by step and each of the models considered incorporates some feature relevant to political economy, everything else being highly stylized. Researchers in political economy will have to embed the elements of theory we provide into their favorite political economy model.

In a nutshell, my view is as follows. From the perspective of contract theory, any realistic political economy model will entail a large number of incomplete contracting features: incomplete constitution, incomplete contract between voters and their representatives, incomplete contracts within the bureaucracy, etc. Consequently, any modeling of the whole picture will require many ad hoc assumptions and will leave us with a rather

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