Published online by Cambridge University Press: 25 July 2019
Recent work on counter-insurgency, client states, foreign aid, and proxy wars uses a principal–agent framework to study the principal’s ability to induce an agent to exert effort on the principal’s behalf. This work broadly emphasizes the moral hazard problem and the actors’ limited commitment power. The latter is usually addressed through the logic of repeated games in which reneging on an agreement triggers future punishment. This study analyzes a related incentive problem that undermines the principal’s ability to induce an agent to exert effort on its behalf. The repeated-game’s enforcement mechanism tends to break down if the principal is trying to get the agent to resolve a problem that, if resolved, (i) creates an ongoing problem for the agent and (ii) simultaneously significantly reduces the agent’s ability to impose future costs on the principal. The principal cannot induce the agent to exert much effort in these circumstances, and the problem persists.
I thank Chris Blattman, Melissa Carlson, Jim Fearon, Mark Fey, Sean Gailmard, Desha Girod, Bard Harstad, Ben Hermalin, Shachar Kariv, Andrew Little, Carter Malkasian, Anne Meng, Harun Onder, Jack Paine, Chris Shannon, Paul Thissen, John Yoo and seminar participants at Berkeley and Rochester for very helpful comments, discussion, and criticism. I gratefully acknowledge the support of the National Science Foundation (SES 1456516).