Monday, October 10, 2016

Make America contract efficiently again

Technical paper issued to explain the Swedish Central Bank "Nobel" Prize in Economics given to Oliver Hart and Bengt Holmström --

Mirrlees (1975) showed that, in some situations, the principal can approximately implement the first-best by penalizing the agent very heavily [equation] when beta takes values that would have been highly unlikely to occur, had the agent chosen the desired action. This is not quite what legal contracts in modern societies look like, and in fact the subsequent literature emphasized situations where Mirrlees's solution (a low-probability threat of extreme punishment) would be infeasible

One challenge with implementing those contracts is that modern society restrains the idea of doing really crazy stuff when an unlikely outcome which is probably but not definitely attributable to underperformance happens. Thus, having a crazy guy in charge of the country who just might do something previously considered unacceptable could be the first-best solution!

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