Essays on Economics of Governance

This dissertation consists of three essays on economics of governance. Chapter 1 studies moral hazard in teams where workers' wages depend on two performance measures: team output and subjective evaluations. Evaluations include both self and peer evaluations. Team output is publicly observable, while evaluations are based on workers' private signals about their own and their coworker's contributions. I say that evaluations are more subjective if, conditional on a worker's contribution, the signals that workers receive about that particular worker's contribution are less correlated. In an optimal contract, how should a worker's pay depend on team output and evaluations, and how does the answer to this question depend on the degree of subjectivity of evaluations? I find that when evaluations are more subjective, pay is optimally less sensitive not only to evaluations but also to output. I also characterize conditions under which optimal contracts are collusion-proof. These results have implications for how and when firms should make use of self and peer evaluations and the distribution of output between the principal and workers within a firm.;Chapter 2 studies the governance of political systems. Economic volatility varies substantially across democracies. We study how the difference between a federal and a unitary system of government could contribute to such variation. We show empirically that federal systems are associated with less volatility in both economic growth and fiscal policy. Motivated by these stylized facts, we develop a political-economic model of policy-making by the central and district governments. In the central government's policy-making, there is an uncertainty about which district representative will be dominant. We model the ultimate policy-making power as held by district governments in a federal system, but by the central government in a unitary system. We show that, in equilibrium, having the ultimate power allows district governments in a federal system to mitigate the uncertainty about the central policy that affects their districts. This, in turn, implies less volatility in both economic growth and fiscal policy compared to a unitary system.;Chapter 3 provides a survey on the literature of hierarchy within organizations. The development of the hierarchy literature can be roughly divided into three phases. In the early phase of the literature, the main theme is to understand how hierarchy emerges as the most effective information processing structure. The major drawback the early literature is that players are simply processors---there is no conflict of interests, hence no incentive to distort information transmission. Then starts the development phase: hierarchy design when incentives (or conflict of interests) are added in. The theme of this phase then, is how to allocate decision making rights between a uninformed, but also unbiased headquarter (centralization), and several informed, but biased divisional managers (decentralization). The hierarchy literature is been re-examined against current trend and challenge of organizations. I point out several venues for future research studies. The first is: How to organize hierarchy in order to combat short-term behavior of managers? The second is, in this fast changing business world, which form of hierarchy is most adaptive to respond to shocks and change? And the third is: What can we learn when we make parallel comparison between organizational literature and political economy literature?...