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Section 6

Section 6. POLISCI 247A/POLISCI 347A/ECON 162. Agenda for the Week. Any questions? Moral Hazard Problems Rule of Law: The Good and the Bad Group Activity Any questions and housekeeping. Moral Hazard Problem. What is the moral hazard problem?

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Section 6

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  1. Section 6 POLISCI 247A/POLISCI 347A/ECON 162

  2. Agenda for the Week • Any questions? • Moral Hazard Problems • Rule of Law: The Good and the Bad • Group Activity • Any questions and housekeeping

  3. Moral Hazard Problem • What is the moral hazard problem? • System by which actors are incentivized to take more risks (or act badly) because the costs of those risks/bad behaviors are diffused • Recap: why might a ruler have a moral hazard problem? • Granted taxes with little transparency or accountability on how it is used. • Modern examples: • Insurance • The International Criminal Court & humanitarian intervention

  4. Discussion Question Do you think individuals behave based on customs, conventions, and norms of behavior (what is appropriate vs. not) or based on rational self interest?

  5. How do we behave? • Norms: informal understandings that create expectations of behavior • Custom: behavior that is by habit • Convention: act based on desiring approval or fearing disapproval • Law: [more] formalized code that governs behavior • De jure vs. de facto

  6. Benefits of Rule of Law • Can provide a focal point by which citizens might resolve the coordination dilemma • Ex: Constitution as a focal point (Weingast 1997) • Governing becomes more generalizable, transparent and prospective • Puts constraints on leaders authority • Citizens are protected universally, stably, and consistently • Jurisdiction can go from local level to international level • International customary law on piracy, slavery, diplomatic immunity, etc. • International adjudication processes (WTO, BITs, human rights, etc) • Developmental benefits: reduction of transaction costs and symmetric information

  7. Issues with Rule of Law • Who are the citizens protected? (Exclusivity) • Evil or tyranny can be indoctrinated (civil disobedience becomes necessary) • People on the margins • Rigidity in the face of uncertainty • What happens when a constitution is inflexible? • Legal coercion is scarce and requires credible commitments by leaders & bureaucracy to enforce it • People need to be incentivized to follow the law • Corruption (outside of ROL) vs. gaming the system (inside of ROL)

  8. Group Activity: Context • So we know that good rule of law is good for developmental outcomes (property rights  economic growth), but from a policy perspective how do we achieve that? • Rule of law is a concept with multiple components that often need to be implemented simultaneously

  9. Group Activity • Break up into two groups, which will each get one component of rule of law. • Discuss amongst your group and be prepared to present the answer to the following questions: • What is [your component]? How do you define it? What does it entail? • Why is [your component] good for developmental outcomes? Provide an example. • When/why might rulers have an incentive to support [your component]? • When/why might rulers not have an incentive to support [your component]?

  10. Next Week • Our last section! [cue tears] • Extended office hours on Monday • Office hours on Thursday, June 2 instead of Memorial Day. • Writing workshop? • Any questions?

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