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Why Politics is More Fundamental Than Economics

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  • Gary Miller
  • Thomas Hammond

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.

Suggested Citation

  • Gary Miller & Thomas Hammond, 1994. "Why Politics is More Fundamental Than Economics," Journal of Theoretical Politics, , vol. 6(1), pages 5-26, January.
    • Handle: RePEc:sae:jothpo:v:6:y:1994:i:1:p:5-26
    DOI: 10.1177/0951692894006001001
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    References listed on IDEAS

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    Cited by:

    1. Charron, Nicholas & Dahlström, Carl & Lapuente, Victor, 2012. "No law without a state," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 176-193.

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