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Incentives and Political Economy$
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Jean-Jacques Laffont

Print publication date: 2001

Print ISBN-13: 9780199248681

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0199248680.001.0001

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Political Economy and the Marginal Cost Pricing Controversy

Political Economy and the Marginal Cost Pricing Controversy

(p.129) 6 Political Economy and the Marginal Cost Pricing Controversy
Incentives and Political Economy

Jean‐Jacques Laffont (Contributor Webpage)

Oxford University Press

This chapter traces the intellectual history of the marginal cost‐pricing rule from Adam Smith to Hotelling. A democratic game is modelled under imperfect information and incentive constraints and it is shown that the rent captured by the majority is very costly to the other group. As a result, the politician–economist relationship is shown to be welfare enhancing if the economist recommends rules that decrease the politician's discretion even at the cost of efficiency.

Keywords:   democracy, discretion, efficiency, Harold Hotelling, imperfect information, incentive constraints, marginal cost pricing, political majority, Adam Smith

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