GERARD PADRO I. MIQUEL, London School of Economics & Political Science (LSE), National Bureau of Economic Research (NBER)
Email: g.padro@lse.ac.uk
PIERRE YARED, Columbia Business School - Finance and Economics
Email: py2114@columbia.edu

This paper characterizes optimal policy when a government uses indirect control to exert its authority. We develop a dynamic principal-agent model in which a principal (a government) delegates the prevention of a disturbance - such as riots, protests, terrorism, crime, or tax evasion to an agent who has an advantage in accomplishing this task. Our setting is a standard repeated moral hazard model with two additional features. First, the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players. Second, the principal suffers from limited commitment. Using recursive methods, we derive a fully analytical characterization of the intensity, likelihood, and duration of intervention. The first main insight from our model is that repeated and costly equilibrium interventions are a feature of optimal policy. This is because they are the most efficient credible means for the principal of providing incentives for the agent. The second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal's inability to commit. Finally, we derive sharp predictions regarding the impact of various factors on the optimal intensity, likelihood, and duration of intervention. We discuss these results in the context of some historical episodes.

ROBERT J. MCCANN, University of Toronto - Department of Mathematics
Email: mccann@math.toronto.edu
XIANWEN SHI, University of Toronto - Department of Economics
Email: xianwen.shi@utoronto.ca
ALOYSIUS SIOW, University of Toronto - Department of Economics, Institute for the Study of Labor (IZA)
Email: SIOW@CHASS.UTORONTO.CA
RONALD P. WOLTHOFF, University of Toronto - Department of Economics, Institute for the Study of Labor (IZA)
Email: ronald.p.wolthoff@gmail.com

This paper presents a tractable framework for studying frictionless matching in school, work, and marriage when individuals have heterogeneous social and cognitive skills. In the model, there are gains to specialization and team production, but specialization requires communication and coordination between team members, and individuals with more social skills communicate and coordinate at lower resource cost. The theory delivers full task specialization in the labor and education markets, but incomplete specialization in marriage. It also captures well-known matching patterns in each of these sectors, including the commonly observed many-to-one matches in firms and schools. Equilibrium is equivalent to the solution of an utilitarian social planner solving a linear programming problem.

YANYAN GAO, Southeast University - School of Economics and Management
Email: adamesky@gmail.com

This paper investigates the selective public goods provision behavior of China’s local government and its effects. Theoretic models of dominative local officials are constructed to understand public goods provision, which is compared with the residents’ as well as sectors’ demand for public goods. The results show that, the official rents diverts local governments’ provision of public goods away from the real demand of residents and results in the coexistence of under-provision and over-provision of public goods; non-agricultural biased public expenditure also results from the self interest of local officials who try to balance between political promotion and social stability; the mismatch of rural public goods between its supply and its demand is due to the conflict between the political mechanism of public goods supply and the economic efficient rule of public goods demand.