Constraining Leviathan

Abstract

Individuals attempting to supply themselves with public goods face well-known free-rider problems. Since at least Hobbes, social scientists have claimed that an `external agent' is necessary to check these problems and thus sustain efficient outcomes in political economies. Contributors to the relevant literature frequently characterize these agents as supplying efficiency-enhancing services (e.g. enforcement) in return for a share of associated efficiency gains. Any incentive scheme that eliminates moral hazard in the other players, however, must create moral hazard in the external agent. That is, the external agent has an incentive to increase its own share, to the detriment of overall efficiency. As a result, unless an external agent can credibly commit against opportunistic behavior, prospective subjects to its authority have a reduced incentive to `enter the game'.

In the present article, we evaluate how political economies might authorize external agents to punish free-riding but otherwise check their ability to opportunistically undermine efficiency. We gain insight into this dilemma by synthesizing theories of the state and firm to illustrate the pivotal role that credible commitments against opportunism play in sustaining efficient collective orders. Our synthesis suggests that a collection of external agents, rather than a unitary agent, has a greater capacity to produce credible commitments against opportunism. In other words, the same forces that work against the efficient provision of public goods (i.e. the incentive to free-ride) can check the incentive for a diffuse `external agent' to play opportunistic actions. Because such constraints are necessary for efficient collective orders, a team of external agents has a comparative advantage (on this dimension) in pushing political economies toward efficient equilibria. We suggest that diffusion of ownership amongst multiple shareholders (in the case of firms) or a broad democratic citizenry (in the case of the state) should therefore play a significant role in enhancing efficiency.