February, 2018

Rooking the State

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Throughout history, governments have engaged in exchange with private actors. Recent work has documented the prevalence of opportunism in a number of government bounty schemes, exploring how private entrepreneurs may rook the state and hence undermine the stated aims of these programs. We draw on transaction cost economics to provide a theory that explains the variation in the extent of opportunism in public-private exchange. The nature and extent of opportunism depends on the ability of the public authority to observe the production process of the good being claimed and the incentives to deny false claims. Where transaction costs limit observation, alternative (i.e., opportunistic) production processes will be prevalent. Where institutional features incentivize lax enforcement, opportunistic production processes will be prevalent. We illustrate our theory with two cases: navigational prizes in Great Britain and wolf bounties in North America. The cases provide evidence consistent with our theory.