Political Economy: The Role of a Profit-Maxamizing Government

The recent onset of European sovereign debt crisis has once again raised awareness of the probability of a national default. While there are many factors that caused this crisis, it is commonly recognized that the corruption and inefficiency of the public sector had the most profound impact. By proposing a model where the primary goal of the government is to share the county’s output and maximize its own profits, we can gain better insights into the interactions between the government and the countrymen. Why do people vote to change the ruling party of their country? Why do people even undertake revolution as a way to attempt to change the government? This paper aims to address these questions by setting forth a simple model that is inspired by the classical principal-agent problem.