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Why Politics is More Fundamental Than Economics

Gary Miller and Thomas Hammond

Journal of Theoretical Politics, 1994, vol. 6, issue 1, 5-26

Abstract: Efficient incentive-compatible schemes for resolving hidden action and hidden information problems have been shown to exist, thereby offering the hope that public goods can be provided in a neutral, non-political way. We argue that this hope is illusory. Such schemes inevitably generate a residual profit, and a property right to the residual creates a stake in inefficiency; the residual can be increased by a distortion of the efficient incentive system. In general, therefore, the residual-owners' claims that they will not distort the efficient incentive scheme are not credible. Economic efficiency in the presence of externalities requires the resolution of a fundamentally political problem: the credible commitment of central officials to the implementation of an efficient incentive scheme that is not in their own best interest.

Keywords: economic efficiency; externalities; incentive-compatible schemes; property rights; public goods; residual profit (search for similar items in EconPapers)
Date: 1994
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