Existing literatures rarely discuss the principal-agent problem within an authoritarian regime. By exploring the evolution of the national granary system in imperial China, this paper studies the multiple interactions of the rulers and the bureaucrats based on their incentives. By using the historical data (1736-1850) of Palace Memorials and Veritable Records of Qing on famine relief, we show that the institutional design of the granary system in Qing caused a moral hazard problem in famine administration. The evidence suggests that for the famine-stricken provinces, the large-scale external subsidies reduced the officials’ incentives of self-insurance. Thus in Jiaqing and Daoguang periods, the grain storage declined. On the other hand, the direct silver relief gradually became...[ Read more ]

Existing literatures rarely discuss the principal-agent problem within an authoritarian regime. By exploring the evolution of the national granary system in imperial China, this paper studies the multiple interactions of the rulers and the bureaucrats based on their incentives. By using the historical data (1736-1850) of Palace Memorials and Veritable Records of Qing on famine relief, we show that the institutional design of the granary system in Qing caused a moral hazard problem in famine administration. The evidence suggests that for the famine-stricken provinces, the large-scale external subsidies reduced the officials’ incentives of self-insurance. Thus in Jiaqing and Daoguang periods, the grain storage declined. On the other hand, the direct silver relief gradually became the main relief method, which was proved to be not as effective as the previous grain relief. I argue that the fundamental incentive misalignment led the efforts of the well-intentioned principal to monitor the officials failed which meant that without the appropriate incentives, the principal hardly pay the costs of monitoring agents. Qing China’s experiences in famine administration provide an instructive example to show what would happen to the public goods provision when the well-intentioned principal does not have the perfect institutional methods to overcome the information problem in supervising its agents.