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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

Chapter:
(p.129) 6 Political Economy and the Marginal Cost Pricing Controversy
Source:
Incentives and Political Economy
Author(s):

Jean‐Jacques Laffont (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0199248680.003.0006

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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