Applied Economic Analysis of Information and Risk by Unknown

Applied Economic Analysis of Information and Risk by Unknown

Language: eng
Format: epub
ISBN: 9789811533006
Publisher: Springer Singapore

We define the ability ratio where (6.30) is held with strict equation . Then if the ability ratio is larger than , the optimal allocation is . On the other hand, the condition of non-negativity of is


Consequently, if I is sufficiently larger than R or is sufficiently close to , this condition is satisfied.

The meanings of this condition are very intuitive. For v in (0, 1), it means that to allocate the authority to both the politicians and the bureaucrats is socially desirable.

If the bureaucrats’ ability is sufficiently higher than the politicians’ one, it enhances the bureaucrats’ effectiveness of effort. Although the bureaucrats’ marginal cost is getting high as the bureaucrats’ authority increases, it is socially desirable that all authority is allocated to the bureaucrats because their effectiveness of effort is sufficiently high.

Also, if I is sufficiently larger than R, the politicians’ effort will be getting close to the bureaucrats’ effort. This means that the effect to the political and administrative output to which the allocation of authority yields is getting small. Consequently, since their cost function is convex, if we decrease the summation of their effort cost by allocating some authority to both players, the social welfare can increase. Then the policy outcome is obtained as follows.


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