October 16, 2007

Nobel Prizewinner edition: Roger Myerson on Leadership, Trust and Power

Abstract: We consider a model of governors serving a sovereign prince, who wants to deter them from corruption and rebellion. Governors must be penalized when they cause observable crises, but a governor’s expected benefits must never go below her rebellion payoff, which is more than any candidate could pay for the office. Governors can trust the prince’s promises only up to a given credit bound. In the optimal incentive plan, a governor’s compensation is deferred until her credit reaches this bound. Each crisis reduces credit by a fixed penalty. When a governor’s credit is less than one penalty from the rebellion payoff, she must be called to court for a trial in which her probability of dismissal is less than 1. Other governors must monitor the trial because theprince would prefer to dismiss and resell the office. A high credit bound benefits the prince ex ante but in the long run generates entrenched governors with large claims on the state.

Roger Myerson (2007), “Leadership, Trust and Power: Dynamic Moral Hazard in High Office,” unpublished paper. Available here.