Tuesday, October 14, 2014

All the way down

Tyler Cowen cites Jean Tirole's Nobel-winning economics as exemplifying elaborations of principal-agent theory (and problems).  Who do you trust to carry out an agreement? Which parts of the deal are implicit and which are explicit? 

There is the regulator and the regulated. The regulator is beholden to the legislature. The legislature is beholden to the voters, Perhaps. Tirole gets credit for formalizing the story. Here are two equations I remember from way back (undergrad days?): 50% + 1 = 100%; 50% - 1 = 0. This describes voting rules in most democracies. In fact, it is 50% of those bothering to show up and to vote, not 50% of "the electorate" and not 50% of those eligible.

So it is principal-agent problems all the way down.  A great achievement of the advanced economies is the widespread extension of trust to strangers. McCloskey cites Bourgeois Virtues. But these can only go so far; where they end is where principal-agent difficulties show up.