Moral Hazard Problem in Public Policymakers
Keywords:
Moral Hazard Problem, Principal, Agent, Public Policy Makers, Premium
Abstract
The moral hazard problem in government organizations is very recurrent due to weak compensation system (i.e., take-home salary) and non-existence of any additional premium (e.g., ownership of stocks) for public policy makers compared to their counterparts in private firms, which weakens the proprietorship of their organization. Since there is a principal-agent relationship between citizens and public policymakers, a loss in public goods and services to citizens signals a meaningful level of moral hazard problem in public policymakers as agents. The menace of moral hazard problem can be lessened through a proper Reward Punishment Approach (RPA). Under existing setup, a weak compensation system with severe punishment mechanics indicates flaws in PRA which needs improvement through reforms in its existing structure. This paper focuses on bringing the compensation system (i.e., take-home salary in terms of cash and a provision of additional premium) at par with market-based package along with various perquisites. The study expects a bare minimum financial implication which may be affordable for the government and decrease moral hazard problem, at least to some extent, leading to a better delivery of public goods and services for the citizens of the country.
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References
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33. Pinstrup, A. P. (ed.) (1988). Food Subsidies in Developing Countries, Baltimore: The Johns Hopkins University Press.
34. Rao, M. G. (2000). Fiscal Decentralization in Indian Federalism. Institute for Social and Economic Change. Banglore, India.
35. Rossel, L., Unger, B., & Ferwerda, J. (2021). Shedding light inside the black box of implementation: Tax crimes as a predicate crime for money laundering. Regulation and Governance. Utrecht, The Netherlands.
36. Rosen, H. S. (1995). Deficit finance. Public Finance. USA: Irwin/ McGraw- Hill.
37. Schwartz, G. & Clements, B. (1999). Government Subsidies, International Monetary Fund, Journal of Economic Surveys Vol. 13, No. 2 # Blackwell Publishers Ltd. 1999, 108 Cowley Rd., Oxford OX4 1JF, UK & 350 Main St., Malden, MA 02148, USA.
38. Sobel, R. S., Stroup, R. L., Macpherson, D. A., & Gwartney, J. D. (2006). Understanding macroeconomics. Singapore: Thomson South- Western.
39. Tanzi, V. & Blejer, M. I. (1988). “Public debt and fiscal policy in developing countries”. In Arrow, J. K. & Boskin, M. J. (Eds.). The Economic of Public Debt (pp. 230-263). London, International Economic Association.
40. The Economist (1994). The Economist News Paper Limited. 1-11 John Adam Street Westminster, London, England.
41. The World Bank (1994a). World Development Report 1994, New York: Oxford University Press.
42. Thirion, E. & Scherrer, A. (2017). Member States’ Capacity to Fight Tax Crimes: Ex Post Impact Assessment. Brussels: Publications Office of the European Union. https://doi.org/10.2861/0761.
43. Tsyrennikov, V. (2007). Capital Outflows and Moral Hazard. New York University.
44. Turksen, U. & Abukari, A. (2020). OECD’s Global Principles and EU’s tax crime measures. Published PDF deposited in Coventry University’s Repository. Emerald. ISSN 1359-0790 ESSN 1758-7239.
45. Will, G. F. (1985a). The soul of conservatism, Newsweek, November 11.
46. Williams, A. (2020). Moral Hazard in A Modern Federation Levy, Economics Institute of Bard College, Public Policy Brief No. 152, 2020.
47. Williams, A. (2020a). “Intragovernmental Autonomous Stabilizers.”. Thesis, M. S. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College.
48. Williams, A. (2020b). “Stabilizing State and Local Benefits Through the Pandemic and Beyond.” Policy Note 2020/2. Annandaleon-Hudson, NY: Levy Economics Institute of Bard College. April.
2. Alam, N. & Taib, F. (2012). Debt Trap and Basic Borrowing Fundamentals: An Analysis of Fourteen Asian Pacific Developing Countries. European Journal of Social Sciences, vol. 28 (1), pp. 42-49, @ Euro Journals Publishing, Inc.
3. Allen, F., Carletti, E., Goldstein, I. & Leonello, A. (2015). Moral Hazard and Government Guarantees in the Banking Industry. Journal of Financial Regulation, Oxford, 2015, 1, 30–50 doi: 10.1093/jfr/fju003.
4. Arrow, K. J. (1963). “Uncertainty and the welfare economics of medical care”, American Economic Review, vol. 53, no. 5, pp. 941-973.
5. Barro, R. J. (1998). The IMF Doesn’t Put Out Fires, It Starts Them, Economic View Point.
6. Becker, G. & Stigler, G. (1974). "Law enforcement, malfeasance, and compensation of enforcers". Journal of Legal Studies 3:1-18.
7. Cenziper, D. (2022). Lawmakers push to uncover riches shielded by state secrecy laws. (https://www.yahoo.com/finance/news/lawmakers-push-uncover-riches-shielded-111359913.html-dated 23-04-21-04-2022).
8. Catherine, S. & Angus, S. (ed) (2006). Concise Oxford English Dictionary. Eleventh Edition revised. Oxford University Press Inc., New York, United States.
9. Congdon, T. G. (1987). “The link between budget deficits and inflation: Some contrast between developed and developing countries”. In Boskin, M. J., Flemming, J. S. & Gorini, S. (Eds.). Private Saving and Public Debt. (pp. 72-91). New York, USA, Basil Blackwell.
10. Corsetti, G., Guimar˜aes, B. & Roubini, N. (2003). Lending of Last Resort and Moral Hazard. A Model of IMF’s Catalytic Finance. European University Institute and CEPR.
11. Council of the European Union (2014). p. 11.
12. Dornbusch, R., Fischer, S. & Startz, R. (2002). Macroeconomics. New Delhi, Tata McGraw-Hill Publishing Company Limited.
13. Gallagher, T. J. & Andrew, J. D. (2003). Financial Management: Principle and Practice. New Jersey: Pearson Education, Inc.
14. Ghosal, S. & Miller, M. (2002). Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures. Deparment of Economics, University of Warwick.
15. Grosh, M. E. (1994). Administering Targeted Social Programs in Latin America, Washington: The World Bank.
16. Gurtner, J. F. (2002). “Currency board and debt trap: Evidence from Argentina and relevance for Estonia”. Centre for Economic Reform and Transformation, School of Management, Heriot-Watt University, Riccarton, Edinburgh, EH144AS, Discussion Paper 2002/04.
17. Ihori, T. (1988). Debt burden and intergeneration equity, the Economics of Public Debt. International Economic Association.
18. Henwood, D. (2019). “Modern Monetary Theory Isn’t Helping.” Jacobin, February 21.
19. Hernandez-Cata, E. (n.d.). Investment, Growth, and Budget Deficit Ceilings. A Review of the Issues. The Paul Nitze School of Advanced International Studies. The Johns Hopkins University.
20. Jensen, M. C. & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics 3, (3), 5-360.
21. Key Indicators of Developing Member Countries of ADB (2021). Asian Development Bank.
22. Lane, T. & Phillip, S. (2001). IMF Financing and Moral Hazard, Finance & Development / June 2001 ©International Monetary Fund.
23. Lucas, R. E. & Stokey, N. L. (1983). Optimal fiscal and monetary in an economy without capital. Journal of Monetary Economics,12, (1), 53-93.
24. Mark, S. & Frank, S. (2003). Center for Investigative Reporting, New York. Friedrich-Ebert-Stiftung, New York Office.
25. Myerson, R. B. (2008-2015). Moral hazard in high office and the dynamics of aristocracy. Economics Department, University of Chicago, 1126 East 59th Street, Chicago, IL 60637, USA.
26. Mussa, M. (2002). Reflection on moral hazard and private sector involvement in the resolution of emerging market financial crises (Draft). Institute for International Economic Washington, D.C.
27. Nii, K. S. (n.d.). The Role of Subsidies as a Means to Increase Welfare.
28. Pauly, M. V. (1968). The Economics of Moral Hazard: Comment. American Economic Review, 58(3): 531-537.
29. Persson, T. & Svensson, L. E. O. (1989). Why a stubborn conservative would run a deficit: policy with time-inconsistent preference. Quarterly Journal of Economics, 104, (2), 325-345.
30. Petrei, A. H. (1987). El Gasto PuÂblico Social y sus Efectos Distributivos Ð Un Examen Comparativo de Cinco PaõÂses de AmeÂrica Latina, Rio de Janeiro: Programa de Estudios Conjuntos sobre IntegracioÂn EconoÂmica Latinoamericana (ECIEL), May.
31. Pettis, M. (2001). The Volatility Machine. Oxford: Oxford University Press.
32. Pierret, L. (2019). Bruges Political Research Papers / Cahiers de recherche politique de Bruges No 78 / November 2019. The political use of the term “moral hazard”: evidence from policymakers of the Eurozone by. European Political and Governance Studies. College of Europe.
33. Pinstrup, A. P. (ed.) (1988). Food Subsidies in Developing Countries, Baltimore: The Johns Hopkins University Press.
34. Rao, M. G. (2000). Fiscal Decentralization in Indian Federalism. Institute for Social and Economic Change. Banglore, India.
35. Rossel, L., Unger, B., & Ferwerda, J. (2021). Shedding light inside the black box of implementation: Tax crimes as a predicate crime for money laundering. Regulation and Governance. Utrecht, The Netherlands.
36. Rosen, H. S. (1995). Deficit finance. Public Finance. USA: Irwin/ McGraw- Hill.
37. Schwartz, G. & Clements, B. (1999). Government Subsidies, International Monetary Fund, Journal of Economic Surveys Vol. 13, No. 2 # Blackwell Publishers Ltd. 1999, 108 Cowley Rd., Oxford OX4 1JF, UK & 350 Main St., Malden, MA 02148, USA.
38. Sobel, R. S., Stroup, R. L., Macpherson, D. A., & Gwartney, J. D. (2006). Understanding macroeconomics. Singapore: Thomson South- Western.
39. Tanzi, V. & Blejer, M. I. (1988). “Public debt and fiscal policy in developing countries”. In Arrow, J. K. & Boskin, M. J. (Eds.). The Economic of Public Debt (pp. 230-263). London, International Economic Association.
40. The Economist (1994). The Economist News Paper Limited. 1-11 John Adam Street Westminster, London, England.
41. The World Bank (1994a). World Development Report 1994, New York: Oxford University Press.
42. Thirion, E. & Scherrer, A. (2017). Member States’ Capacity to Fight Tax Crimes: Ex Post Impact Assessment. Brussels: Publications Office of the European Union. https://doi.org/10.2861/0761.
43. Tsyrennikov, V. (2007). Capital Outflows and Moral Hazard. New York University.
44. Turksen, U. & Abukari, A. (2020). OECD’s Global Principles and EU’s tax crime measures. Published PDF deposited in Coventry University’s Repository. Emerald. ISSN 1359-0790 ESSN 1758-7239.
45. Will, G. F. (1985a). The soul of conservatism, Newsweek, November 11.
46. Williams, A. (2020). Moral Hazard in A Modern Federation Levy, Economics Institute of Bard College, Public Policy Brief No. 152, 2020.
47. Williams, A. (2020a). “Intragovernmental Autonomous Stabilizers.”. Thesis, M. S. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College.
48. Williams, A. (2020b). “Stabilizing State and Local Benefits Through the Pandemic and Beyond.” Policy Note 2020/2. Annandaleon-Hudson, NY: Levy Economics Institute of Bard College. April.
Published
2023-03-30
How to Cite
Alam, N. (2023). Moral Hazard Problem in Public Policymakers. European Scientific Journal, ESJ, 19(7), 24. https://doi.org/10.19044/esj.2023.v19n7p24
Section
ESJ Social Sciences
Copyright (c) 2023 Noor Alam
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
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