Political Multi-task Problems, Incentive Pay and Citizen Participation

Abstract

We analyze the extent and effectiveness of electoral accountability and the problems related to keeping the politicians accountable. We illustrate the importance of developing incentive tools to discipline the incumbents. We propose "incentive pay" as an effective tool and we analyze its potentials and limitations. To assess the appropriate incentive schemes, we first explore the sources of (re)election incentives for politicians. To analyze the political agency problem, we focus on politician’s private interest. We formally characterize the "politcal multi-task problem" in which the office-holder has two tasks: to determine the level of public-good spending and to finance public-good spending by taxing the citizens’ private good in a society where citizens’ private-good endowments are heterogeneous. Political multi-task problems typically have outcomes that are difficult to measure. Moreover, citizens have conflicting opinions about optimal policies. The agent has the power to tax the citizens to invest in desired outcomes of some tasks. In such an environment, policy-maker chooses socially inefficient public good levels and expropriates minorities. The model, while simple and abstract is useful to gain a balanced perspective on the conflict of interest between citizens and the policy-maker. In the main body of this thesis, we study how to efficiently motivate policy-makers to solve political multi-task problems. We propose taxation constraints and "incentive pay" as a tool to discipline incumbents. We study offering performance pay to politicians as a tool to incentivize them. We show that a judicious combination of constitutional limit on taxation and incentive pay based on the level of public-good provision by the officeholder improves welfare. As an extension to the basic model, we explore the effect of incentive pay on a policymaker who is not solely motivated by private interest, but also has social welfare concerns. Moreover, we study the results when candidates can compete at the campaign stage by announcing their desired level of incentive pay. As an alternative disciplining tool, we finally turn to formal citizen participation. We describe the different forms of citizen participation available, and we explore their effectiveness, before addressing "Co-voting", a novel form of citizen participation. To complete our analysis, we discuss the interplay between incentive contracts and citizen participation. In particular, we show that Co-voting is a supporting tool to implement incentive pay than to a referendum or to parliamentary vote.