Confucianism and the Legalism: A Model of the National Strategy of Governance in Ancient China

Transcription

1 MPRA Munih Personal RePE Arhive Confuianism and the Legalism: A Model of the National Strategy of overnane in Anient China Haiwen Zhou 13 Otober 017 Online at MPRA Paper No , posted 16 Otober 017 0:30 UTC

2 Confuianism and the Legalism: A Model of the National Strategy of overnane in Anient China Haiwen Zhou Abstrat The Confuianism shool emphasizes family value, moral persuasions, and personal relations. Under Confuianism, there is a free-rider issue in the provision of efforts. Sine national offiials are hosen through personal relations, they may not be the most apable. The Legalism shool emphasizes the usage of inentives and formal institutions. Under the Legalism, the ruler provides strong inentives to loal offiials whih may lead to side effets beause some ativities are nonontratible. The old-blood image of the Legalism may alien itizens. By exploiting the paternalisti relationship between the ruler and the ruled under Confuianism and the strength of institution-building under the Legalism, the ruler may benefit from a ombination of Confuianism approah and the Legalism approah as the national strategy of governane. As eah strategy has its pros and ons, whih strategy of is optimal depends on fators suh as the minimum enforeable level of publi servie and the level of institution building osts. Keywords: Confuianism, Legalism, national strategy of governane, anient China, inentive provision, ulture JEL Classifiation Numbers: N45, H10, A10 1. ntrodution A national strategy of governane was useful to unify thoughts, to guide expetations, and thus to onsolidate resoures to ahieve national goals. Rulers in anient China might hoose from different national strategies of governane. First, the Confuianism approah ould be used as the national strategy of governane. Seond, the Legalism approah ould be used as the national strategy of governane. Third, different ombinations of Confuianism approah and the Legalism approah ould be used as the national strategy of governane. 1 There are some interesting questions about the national strategies of governane in anient China. First, Confuianism was believed by many to be too idealisti. t was also frequently ritiized as an obstale for the adoption of new and valuable ideas. f so, why did rulers in anient China promote Confuianism as a national philosophy? Seond, while the institutions from the Legalism shool helped Qin Shi Huang to unite China in 1 BC, why did many rulers avoid promoting the Legalism publially as 1 Other strategies of governane were also pratied in anient China. For example, at the beginning of the Han Dynasty (06 BC 0, the Daoist was followed as a national strategy of governane. The Daoist shool promoted a life style of a hermit (Waley, 198. Under the influene of the Daoist shool, the Han government had a laissez - faire attitude toward the daily lives of itizens. 1

3 a national strategy of governane? Finally, what were the key fators affeting a ruler s hoie of national strategy of governane? There are voluminous studies on anient China. For example, Huang (198, 1997, 1999 and Wong (1997 provide illustrations of China s general history. Elvin (1973, Chao (1986, Huang (1974, Shiue (004, 005, and Shiue and Keller (007 speialize on eonomi history. Lin (1995, Wong (1997, and Pomeranz (000 fous on the divergene between China and Europe in terms of ahieving industrial revolution independently. More speifi to this paper, u (010 and Waley (198 provide illustrations of different shools of thoughts in China. However, to our best knowledge, there is no formal model addressing the national strategy of governane in anient China. A formal model will be useful to organize our thinking on this important issue. This paper ontributes to the literature by interpreting the key features of Confuianism and the Legalism from the perspetive of eonomis and analyzing the advantages and disadvantages of using Confuianism and the Legalism as a national strategy of governane in anient China in a formal model. n this model, there are multiple distrits. n eah distrit, output is determined by the labor input and publi servie of loal offiials and the average ability of national offiials. A higher amount of institution building will lead to higher average ability of national offiials with the orresponding higher ost. The ruler hooses the national strategy of governane whih determines the levels of labor input and publi servie of loal offiials and the average ability of national offiials, and thus the level of output in eah distrit. Suppose beyond a minimum level of publi servie, the ruler ould not write a ontrat on the level of publi servie provided by a loal offiial. First, we study the first-best ase as a benhmark. n the first-best ase, inputs of a loal offiial and the degree of institution building are optimally hosen. We show that there is omplementarity in the hoies of labor input and publi servie of loal offiials and the hoie of the intensity of institution building. The ruler provides less inentive to loal offiials when the institution building ost inreases. A derease of the ost of effort of a loal offiial leads to higher levels of publi servie and labor input. n the first-best ase, the levels of publi servie, labor input, and the intensity of institution building inrease with the number of administrative regions in the ountry. Seond, we study the usage of Confuianism as a national strategy of governane. Under the Confuianism approah, the ountry was like an extended family and moral persuasions rather

4 than inentives were emphasized. Also, Confuianism valued personal relations. We show there are pros and ons of the Confuianism approah. On the one hand, beause relying on formal inentives ould lead to negative side effets, there are roles to be played by ulture and soial norms. More speifially, Confuianism an be used as an informal ontrat to soften the freerider problem when no formal inentive was provided. On the other hand, under Confuianism, sine loal offiials share loal output, there is a free rider issue. Also, sine national offiials are hosen through personal relations, national offiial may not be the highest quality. Third, we study the usage of the Legalism as a national strategy of governane. Under the Legalism approah, the ruler provided strong inentives to itizens and emphasized the usage of institutions in ahieving desired results. Also, the government had a strong ontrol of the daily lives of itizens. There are pros and ons assoiated with the Legalism approah. On the one hand, the free-rider issue in the provision of efforts is solved. f the number of distrits in the ountry is high, it pays to build formal even though ostly institutions to selet national offiials. On the other hand, providing strong inentives to loal offiials ould lead to undesirable side effets (Lazear, 1989, Holmstrom and Milgrom, Sine the level of publi servie is nonontratible, under the Legalism, the provision of publi servie by a loal offiial ould be too low. Also, the old-blood image of the Legalism may alien itizens. The Legalism shool argued that reward and punishments should be signifiant and itizens should be kept poor to make the poliies more effetive. n addition, individuals were restrited in their areer hoies and residential hoies. We show that those strategies adopted by the Legalism shool are onsistent with eonomi theory. As those measures dereased the reservation utility of a itizen, they dereased the ost of providing inentives to itizens and inreased the payoff of the ruler. Showing the working of the Legalism as a system is another ontribution of this paper to the literature. Finally, we disuss whih strategy should be adopted as the national strategy of governane. Whih approah would work better than others depends on various fators. First, when the ost of institution building is lower, or if the spread of the distribution of talents in soiety is higher, the ruler is more likely to use institutions in the seletion of national offiials. Seond, when the minimum enforeable level of publi servie inreases, the ruler will provide more inentives to loal offiials. Third, an inrease of the number of administrative regions would inrease the adoption of formal institutions in the seletion of national offiials. 3

5 This paper is related to two lines of literature. First, this paper is related to the literature showing that negative externalities might be generated if the prinipal provides strong inentives to agents. n Lazear (1989, a large reward to the winner of a ontest will inrease a ontestant s alloation of resoures to sabotages rather than to produtive ativities. n Holmstrom and Milgrom (1991, a prinipal benefits from an agent s effort in multiple ativities. f the prinipal does not provide inentive to the agent, the agent will alloate effort on multiple ativities. Rewarding one ativity with a low variane of measurement an lead to the derease of effort on other ativities with higher varianes of measurement. As a result, the payoff to the prinipal when inentive is provided to the agent ould be lower than that when no inentive is provided to the agent. Seond, this paper is related to the literature on ulture and soial norms. While Confuianism was promoted by rulers intentionally as a national philosophy, soial norms ould be formed spontaneously. However, one the ideas of Confuianism had beome ingrained into the value systems of itizens, they beame a part of the soial norms. The fous in this paper is different from the fous of models on soial norms. Models on soial norms study the impat of soial norms on soial welfare. On the one hand, Fang (001 shows that soial ulture an be used to overome informational free-riding problem. On the other hand, Elster (1989 argues that soial norm may not always inrease soial welfare and various praties that ould inrease soial welfare have not been inorporated into soial norms. This model does not fous on how Confuianism or the Legalism may overome market failure. t reognizes the pros and ons of Confuianism and the Legalism and fouses on the onditions under whih one strategy would work better than others. The rest of the paper is organized as follows. Setion illustrates the historial development of national strategies of governane in anient China to motivate the model. Setion 3 speifies the model. Setion 4 addresses the first-best national strategy of governane. Setion 5 studies the usage of Confuianism, the Legalism, and different ombinations of the Confuianism and the Legalism as a national strategy of governane and ompares the performane of different strategies of governane. Setion 6 onludes.. Historial Development of National strategies of overnane in Anient China n this setion, we illustrate the historial development of different national strategies of governane in anient China. One thing we should keep in mind is that the development of eah 4

6 shool of thought is a dynami proess. Historially, eah shool of thought benefited from and borrowed ideas from other shools of thought. One hundred shools of thoughts inluding Confuianism and the Legalism appeared during the Spring-Autumn Period (770 BC-476 BC and the Warring States Period (475 BC-1 BC. During this period, beause vassals engaged in wars of annexation, the number of autonomous politial powers dereased over time. First, at the beginning of the Spring-Autumn Period, there were more than four hundred autonomous politial powers. Seond, at the beginning of the Warring States Period, there were only seven major states. Finally, at the end of the Warring States Period, the State of Qin united China in 1 BC. This period of fiere ompetition among rulers reated a relatively tolerant environment for different shools of thoughts to prosper. Sholars from different shools tried to promote their poliies to rulers dreaming of strategies that ould lead to their military dominane over their peers..1. Confuianism The origin of the Confuianism went bak to the Duke of Zhou (? 1043 BC of the Zhou Dynasty (1046 BC-56 BC. t is laimed that the Duke of Zhou developed li (ritual to regulate the relationship between the Zhou ruling house and vassals and other nobles (Huang, The Zhou Dynasty ould be viewed as pratiing of Confuianism. At that time, ommunities had small sizes of population. Under Confuianism, soiety was organized by a hierarhy of relations. Loyalty and filial piety were viewed as important virtues. Famous sholars of the Confuianism inlude Confuius (551 BC-479 BC and Menius (37 BC-89 BC. Confuius had a very suessful reord in eduating students as it was laimed that he had more than three thousand students of whih seventy-two were prominent. Viewing the period of the Duke of Zhou as the golden time, Confuius thought it would be good to go bak to the politial system in the early period of the Zhou Dynasty. Even though Confuius was elevated to high status after his death, his politial areer was not very suessful. He spent many years in promoting his ideas to rulers in different states and was not well reeived. Menius also tried to promote his ideas to rulers. With his fame, he got some interviews suh as with the King Hui of Liang (Wei. As Menius tried to promote yi (righteousness and the rulers were interested in quik and pratial solutions to the questions they faed, Menius lost his audiene and was not very suessful in his politial areer. 5

7 There are some important features of Confuianism. First, the objetive of Confuianism was to establish a harmoni soiety, rather than to promote the interests of the ruler. For example, Menius thought that itizens were more important than the government, and the government was more important than the ruler. Seond, the Confuianism shool did not enourage the usage of material inentives and opposed the usage of severe punishments to rule. To motivate individual behavior, moral obligations were emphasized. For Confuianism, a ountry is an extended family and a ruler should take are of his itizens like a father would take are of his hildren. Both the ruler and his subjets and a father and his hildren have their rights and obligations. The ruler should behave like a ruler and a minster should behave like a minister, and a father should behave like a father and a son should behave like a son (jun jun, hen hen, fu fu, zi zi. Third, the Confuianism shool did not value institutions in induing desirable behavior. This shool thought that human nature was good. ood behavior resulted from good human nature and institutions would not be neessary to indue good behavior. To rule effetively, the ruler should find people with high moral standards and plae them at important positions. Reommendations by loal ommunities or highly respeted persons would be a valuable strategy to selet government offiials. Moral teahing was used to onvine government offiials that orruption should not be pratied. The ruler should trust government offiials. Fourth, in terms of foreign relations, Confuianism disouraged a state s invasion of other states. Confuianism argued that by following the guidane of li, a humane ruler would indue residents in other states to aept the rule of the humane ruler voluntarily. Relying on military fore as a defense would be inferior and would be unneessary for a state. Overall, Confuianism emphasized family value and moral persuasions. Also, personal relations rather than institutions were emphasized. The Confuianism approah had a merit of enouraging the rulers to take the welfare of itizens into onsideration in their ruling. However, the Confuianism approah ould be too idealisti and ould not fit reality. n reality, the seletion of government offiials through reommendations valued by Confuianism led to high level of orruption. High positions of the government were monopolized by individuals with strong family bakgrounds and apable individuals with weak family bakgrounds ould not get high rank positions (Qian,

8 . The Legalism The Legalism shool argued that law should be applied equally among all individuals, regardless of the position of an individual. This shool did not depit a romanti piture of the past and had a pragmati attitude in designing poliies to handle governmental affairs. During the Spring-Autumn period and the Warring States period, the Legalism shool was adopted by uan Zhong (about 73 BC or 716 BC 645 BC of the State of Qi, by Shen Buhai (about 385 BC 337 BC of the State of Han, and by Li Kui (455 BC 395 BC of the State of Wei. More signifiantly, the Qin Dynasty (1 BC 06 BC adopted the Legalism as the national strategy of governane. uan Zhong, who introdued various types of soial and eonomi poliies in the State of Qi and helped the State of Qi to beome a superpower at that time, was usually redited as a pioneer of the Legalism shool (Lu, 011. Shang Yang (about 395 BC 338 BC and Li Si (about 84 BC 08 BC, the prime minister of Qin Shi Huang (59 BC 10 BC were also some of the famous followers of the Legalism. deas of the Legalism were synthesized by Han Fei (about 81 BC - 33 BC who was a member of the royal family of the State of Han. Han Fei integrated the three tools of ruling proposed by other thinkers of this shool: law (fa, politial tatis (shu, and authority (shi. First, law would be used to rule average itizens. Seond, politial tatis would be used to ontrol powerful ministers. Third, a ruler s authority depended on his position, legitimay, and the high pressure produed under harsh law. Han Fei was mainly a sholar, and his politial areer was not very suessful and he died in the jail of the State of Qin. 3 There are some important features of the Legalism. First, the sole purpose of the Legalism was to make the rule of the ruler longer. 4 For the Legalism, eah itizen should be loyal to the ruler rather than loyal to his father or his lan. To further the interest of the ruler, a ruler s adoption of the Legalism was assoiated with a tight ontrol of soiety. For example, Han Fei thought that only peasants and soldiers were useful for soiety. Other professionals suh as Confuianism followers should be prohibited to maximize the number of individuals diretly engaging in Qin Shi Huang united China in 1 BC and he was the first emperor of China. Before this unifiation, Qin was one of the states ompeting for the unifiation of China. n this paper, Qin is used to refer to both the Qin Dynasty after the unifiation of China and the State of Qin before the unifiation of China. 3 While Han Fei argued in his writing that the trust of the ruler should be ensured before a sholar began advising the ruler, he did not get the trust of Qin Shi Huang before he advised Qin Shi Huang. Even though Qin Shi Huang admired Han Fei s works, he deided to put Han Fei into jail. Li Si, who was a former lassmate of Han Fei and jealous of his abilities, played a bad role in the death of Han Fei. 4 That is, the purpose of the Legalism shool was not to ensure the rule of law. 7

9 prodution. Seond, as disussed in the Shang Yang Reform later on, the Legalism emphasized the usage of inentives to govern. Third, the Legalism emphasized the usage of institutions in induing desired behavior. Not inonsistent with the standard assumption in modern eonomis that individuals are self-interested, the Legalism shool thought that human nature was bad. 5 As an individual ould not be trusted, rather than trying to find good individuals to serve the government, this shool of thought paid muh attention to the design of institutions to prevent undesirable things from happening. 6 Even though the ability of the ruler may not be high, if the institutions were well designed, the government would still funtion well. This was different from the approah of Confuianism whih emphasized that offiials should have high moral standards and should be apable. To prevent powerful ministers from rebelling, the Legalism followers thought that the division of power should be implemented among offiials to ensure the rule of the ruler. To selet government offiials, the Legalism shool thought that an impartial system suh as the mperial Examination System should be used. Fourth, in terms of foreign relations, the Legalism shool enouraged the building of a strong army. n the ase of the State of Qin, the state was turned into a war mahine under the Legalism influene. For rulers trying to survive the ompetition among states, the Legalism approah was more pratiable than the Confuianism approah. The famous Shang Yang Reform of the State of Qin is an example of the appliation of the thoughts of the Legalism. Before the reform, the State of Qin was not a superpower among the states. Started at 356 BC, Shang Yang introdued a series of institutional reforms in about twenty years. Poliies tried to provide strong inentives to individuals. 7 First, publi land (the well field system was eliminated and land was privatized. ndividuals exlaiming new piees of land would be granted ownership of the land. Various poliies suh as tax poliies were established to attrat immigrants and to enourage internal population growth. Seond, individuals would be awarded government positions aording to their ontribution to the government rather than 5 Han Fei did not think the selfishness nature of individuals would be a problem. n his opinion, the reason that itizens followed the ruler was beause the ruler had the power to reward and punish. f instead itizens did not response to reward and punishment, it would be very diffiult for the ruler to ontrol his itizens. 6 Zhou (01 has a disussion of the strategies used by rulers in anient China to prevent internal rebellions. Those strategies might weaken the ountry s abilities to defend external threats. 7 There were also measures taken to inrease produtivity. For example, measurement units were united to ahieve eonomies of sale. When the State of Qin united China, the government provided standards for the writing of Chinese, the size of wagons, and the measurement units at the national level. 8

10 aording to their blood. Positions needed to be earned rather than inherited. Signifiant punishments and rewards were used to indue individuals to fight for the ountry rather than for their lans. Third, various poliies inreased the diret ontrol of the ruler of Qin over soiety. For example, rather than awarding land to vassals to be ruled indiretly, ounties were established to be ruled by the ruler diretly. An individual was required to report to the government if his neighbor engaged in unlawful ativities. nstitutional reforms introdued by Shang Yang helped to onsolidate resoures for the Qin rulers. 8 Even though some other states also engaged in reform, the Shang Yang Reform was more extensive than other states. As a result, the State of Qin beame a formidable superpower among the states. About 135 years after the reform, Qin Shi Huang was able to annex the other six major states and ahieved unity of China in 1 BC. Overall, the Legalism tried to provide material inentives to individuals to indue the desired results. There are pros and ons of the Legalism. On the one hand, the Legalism emphasized institution building. n China s history, institutions of the Qin Dynasty heavily influened the institutions of all following dynasties. On the other hand, the old-blood promotion of the sole interests of the rulers might atually bakfire beause itizens might feel aloof under a ruler adopting the Legalism as the national strategy of governane. The usage of strong inentives under the Legalism also led to negative effets. One aspet of the negative effetives is that itizens might heat to take advantage of the inentive system under the Legalism. For example, when soldiers were rewarded by the number of heads of enemy soldiers ut down in the battlefields, some soldiers heated by utting down the heads of ivilians to invite reward. As individuals were enouraged to fous on material rewards, the Legalism was ritiized by Confuianism followers suh as Dong Zhongshu (179 BC 104 BC for leading to harsh relations even within a family: if the son tried to borrow a ue from the father, the father would feel unhappy; if the mother tried to borrow a rake from the son, the son would be relutant. Under the Legalism, if a husband had onduted a rime, the wife should report the rime to the government and would be rewarded for doing this. Atually, Han Fei argued that a person should not even trust his wife and his hildren. For Confuianism followers viewing filial piety as an essential virtue, the above would be unaeptable. 8 As the interests of the nobles were harmed by the poliies introdued by Shang Yang, some of them tried to sabotage those poliies. When the prine violated the law, his mentors were punished by Shang Yang. Shang Yang was killed when the inumbent duke (Duke Xiao of Qin passed away and the prine beame the new ruler (King Huiwen of Qin. However, the poliies introdued by Shang Yang were kept. 9

11 .3. A Combination of Confuianism and the Legalism The rule of the Qin Empire did not last long. After the death of the founding emperor Qin Shi Huang in 10 BC, the Qin Empire ollapsed in 06 BC. t is ommonly believed that the harsh laws of the Qin Dynasty ontributed to the fall of the Qin Empire: two individuals (Chen Shen and Wu uang initiated a rebellion beause they would miss the deadline of arriving at the destination they were supposed to provide their military servie. Aording to the Qin law, missing the deadline would lead to the death penalty. Rather than waiting to be sentened to death, they deided to rebel. Their rebellion led to other rebellions around the ountry and the Qin Dynasty eventually ollapsed. While the Qin sueeded in unifying China, the fast ollapse of the Qin Dynasty raised an important question: was the fall of the Qin Dynasty a result of the fundamental flaws of the Legalism or was the fall a result of a wrong appliation of the Legalism? f the laws were less harsh as those implemented in the Qin Empire, will the Legalism work? Liu Che (156 BC 87 BC, an emperor in the Han Dynasty, is ommonly viewed as the first ruler attempting to ombine the benefits of Confuianism and the Legalism. As a young emperor, Liu Che had a strong desire to win wars with Xiongnu. Liu Che soliited proposals from itizens on strategies to inrease the wealth and military power of the ountry. At that time, Dong Zhongshu reformulated Confuianism. Dong Zhongshu inorporated some ideas from the Legalism into his new Confuianism, he also inorporated the ideas that the power of the emperors was divine and there were unity between deity and human beings. 9 He suggested Liu Che to promote his new Confuianism while to disourage other shools of thoughts. Liu Che adopted Dong s suggestions and Confuianism beame the national philosophy of China. The Confuianism was taught at the national level and it was used to ahieve ultural unity in anient China. While the Confuianism reeived a high status as the essential part of the national philosophy, rulers knew the limitations of the Confuianism. 10 n pratie, institutions were frequently designed under the priniples of the Legalism. 11 However, beause the Legalism had a 9 For Dong, if an emperor did not follow the order of the heaven, the heaven would provide some signals suh as earthquakes to warn the emperor. This was a mehanism to provide some restraints on the behavior of emperors. 10 Even though Liu Che elevated Confuianism to a high status, he used government offiials with various bakgrounds suh as followers of the Legalism shool. 11 Wang Mang (45 BC - 3 AC, a ontroversial figure in China s history, tried to implement a large-sale institutional reform aording to the priniples of Confuianism, was not suessful. 10

12 harsh image to itizens and it might alien itizens, a ruler might not want to publily promote the Legalism as the national strategy of governane. 1 Sine Liu Che, most rulers in the past two thousand years of China used a ombination of Confuianism and the Legalism to rule. Under this ombination, loal affairs below the ounty level were handled in the Confuianism style. Clan leaders made various deisions for group members. Consistent with the Legalism approah, institutions were built for the running of the entral government. This kind of ombination of Confuianism and the Legalism was sometimes alled ru biao fa li (a Confuianism exterior overing the Legalism ore. This ombination of Confuianism and the Legalism had its pros and ons. On the one hand, this ombination of Confuianism and the Legalism led to benefits to the rulers and made the government last longer. The propaganda of Confuianism led to the impression that the rulers were trying to maximize soial welfare, rather than their personal benefits. This warm relationship between the rulers and the ruled dereased the intention of the ruled to rebel. The pratie of the Legalism in atual ruling inreased the organization apaity and military power of the ountry and thus dereased the possibilities that the ountry would be destroyed by enemies. On the other hand, beause Confuianism and the Legalism shool have different and usually opposite poliy impliations, onflits frequently arose. For sholars eduated in the tradition of Confuianism, they would soon find out that the skills needed to pass the mperial Examinations might not be relevant to the handling of governmental ativities (Lu, 011. Stiking to the ideas of Confuianism produed loyal ministers that even the emperors did not feel omfortable with. To learn the subtle points of handling atual governmental affairs, would-be government offiials frequently pratied as personal aids to government offiials if they were luk enough to have this kind of opportunities. 3. Speifiation of the model n this setion, we speify the model. There is a ruler who will hoose the national strategy of governane. There are idential distrits in the ountry. n eah distrit, there are m loal offiials. Eah loal offiial deides how muh publi servie and labor input to provide. For [ 0, ] and [ 0, ], output in a distrit is determined by the sum of the level of publi servie 1 Qin Shi Huang, who promoted the Legalism, had a bad reputation of being ruel. 11

13 , sum of the labor input of loal offiials, and the average ability of national offiials. Speifially, for denoting a onstant between zero and one and denoting the average ability of national offiials, the level of output in a distrit is speified as 1. National output is the sum of output of all distrits. A loal offiial s ost of providing publi servie and labor input is determined by the sum of publi servie and labor input. More speifially, for k denoting a positive onstant, a loal offiial s ost of effort is k( /. We assume that the ruler is able to write a ontrat with a loal offiial on the level of labor servie, but he is not able to write a ontrat with a loal offiial on the level of publi servie provided. However, there is a minimum level of publi servie g. A ruler would be able to detet if a loal offiial s provision of the publi servie is lower than this ritial level. The above speifiations an be motivated as follows. Suppose a loal offiial exerts effort to ollet taxes for the ruler (labor servie and also provides effort to ensure the stability of soiety (publi servie. t ould be more diffiult to measure a loal offiial s ontribution to soial stability than to measure the amount of tax revenue olleted. A loal offiial may use various extraordinary strategies to ollet taxes leading to the resentment of itizens. With a lower level of satisfation, itizens may rebel. Prevention of rebellion requires the minimum level of pubi servie. While the exat level of satisfation of itizens may be hard to observe and measure, it is easier to detet the existene of a rebellion. There are two approahes in the seletion of national offiials and thus the determination of the average ability of national offiials. 13 First, a ruler may hoose national offiials through his personal preferene. n this ase, the average ability of national offiials is, an exogenously given positive number. Seond, the ruler may engage in institution building suh as the imperial examination system to hoose the best qualified offiials. Let n denote the intensity of institution building and n [ n, n]. A higher number of n indiates a more intensive effort of institution 13 n this model, the inentive issue of national offiials is not addressed expliitly. This assumption an be justified as follows. Suppose that national offiials were paid fixed salaries and it was easier for the ruler to monitor national offiials than loal offiials. Alternatively, national offiials might be viewed as more motivated by areer onerns than loal offiials. With more monitoring of national offiials or stronger areer onerns, the inentive issue of national offiials would be less signifiant as ompared with that of loal offiials. 1

14 building. nstitution building is ostly. 14 Let denote a positive onstant. f the fixed ost of institution building is f (n, the average ability of national offiials is (n. To apture the idea that a higher level of institution building will result in a higher average level of ability of national offiials, we assume that '( n 0 and f '( n We also assume that (n and (n. That is, the average ability of national offiials hosen formally through institutions is always better than that of national offiials hosen through personal relations. The ruler may hoose from different national strategies of governane. First, when the ruler does not provide inentives to a loal offiial s hoies of efforts and national offiials are hosen through personal preferenes, this strategy of governane is alled Confuianism. Seond, when the ruler provides inentives to loal offiials and hooses national offiials through the highest level of institution building, this strategy of governane is alled the Legalism. 16 Third, a ruler may use different ombinations of Confuianism and Legalism to rule. 4. The first-best outome n this setion, we study the first-best national strategy of governane in whih the levels of inputs of a loal offiial and the degree of institution building are optimally hosen to maximize 1 national surplus. The value of national output is [ ( n ( m ( m ]. The total ost of efforts mk by all loal offiials in the nation is ( and the total ost of institution building for the nation is f (n. The objetive is to hoose the level of publi servie and labor input of a loal offiial, and the degree of institution building to maximize national surplus V F ( n( m ( m Optimal hoies of,, n require that 1 mk ( f ( n. (1 14 One alternative interpretation of the ostly institution building assumption is that the appointment of government offiials through personal relations brings more personal benefits while appointment through formal institutions brings less benefit to the ruler. 15 The speifiation of institution building osts is similar to the speifiation of the hoie of tehnologies in Zhou (004, 009. Zhou (004 provides a disussion of the tradeoff between fixed and marginal ost of prodution in the hoie of tehnologies. Zhou (009 uses the hoie of tehnology approah to address the lak of industrialization in anient China. 16 f under the Legalism, the level of institutions an be hosen in a ontinuous way like the first-best ase, the main results of the paper would not hange. 13

15 1 1 ( n k( 0, (a 1 (1 ( n k( 0, (b 1 3 '( n m f '( n 0. ( The set [ 0, ] [0, ] [ n, n] is a lattie with the usual ordering. Partial differentiation of (1 leads to V 0 V V F, F 0, F (3 n n The following proposition studies the impat of a hange of the level of the ost of exerting effort on the levels of inputs and the intensity of institution building. Proposition 1: n the first-best ase, the levels of publi servie and labor input of a loal offiial, and the intensity of institution building derease with the ost of effort. Proof: Define t k. Partial differentiation of (1 leads to V V F 0, F 0, and t t V F 0. From Topkis (1998, hap., the objetive funtion (1 is supermodular in,, n, nt and k. Maximizing a supermodular funtion on a lattie,,, and n dereases with k. From Proposition 1, an inrease of a loal offiial s ost of effort will derease the inentive to build institutions for the seletion of national offiials. 18 The reason is that an inrease of a loal offiial s ost of effort dereases the marginal benefit of a more intensive institution building. As a result, less institution building should be hosen. Rosenthal and Wong (011 have argued that the huge size of anient China ompared with a given ountry in Europe ould be used to explain the divergene between anient China and Europe in terms of ahieving industrialization independently. The size of a ountry an be 17 By using (a and (b, it an be shown that 1 / 0 and / Similar to the proof of Proposition 1, it an be shown that in the first-best ase, the objetive funtion (1 is supermodular in,, n, and. Thus, the levels of publi servie and labor input of a loal offiial, and the intensity of institution building derease with the ost of institution building. To understand this result, the marginal benefit of more publi servie or labor input by a loal offiial dereases when the average ability of national offiials is lower. As a result, the equilibrium levels of publi servie and labor input by a loal offiial derease with the ost of institution building. 14

16 aptured by an inrease of the number of administrative regions in this model. The following proposition studies the impat of a hange of the number of administrative regions on the hoie of effort levels of a loal offiial and the intensity of institution building. Proposition : n the first-best ase, the levels of publi servie and labor input of a loal offiial, and the intensity of institution building inrease with the number of administrative regions. Proof: Partial differentiation of (1 leads to V 0 V V F, F 0, and F 0. Thus n (1 is supermodular in,, n, and. From Topkis (1998, hap.,,, and n inreases with. From Propositions 1 and, there is omplementarity between inentive provision to loal offiials and institution building. Higher efforts of loal offiials will lead to more institution building in the seletion of national offiials, and vie versa. 5. Performane of different national strategies of governane The first-best ase may not be feasible in reality. n this setion, we study the performane of different feasible strategies of governane: Confuianism, the Legalism, and ombinations of Confuianism and the Legalism. Then we ompare the performane of different strategies of governane Performane of Confuianism n this subsetion, we study the senario that the ruler uses Confuianism as the national strategy of governane. Under Confuianism, the ruler will deal with a ommunity (in this model, a distrit rather than deal diretly with a loal offiial. Compared with a lump-sum tax, a nonlump sum tax may derease loal offiials inentives to provide publi servie and labor input and thus dereases total soial surplus. Sine rulers under Confuianism are assumed to maximize soial welfare, we assume that the ruler harges a lump-sum tax from a distrit under Confuianism. Beause a lump-sum tax is a transfer between the ruler and a distrit and it may not affet the total amount of surplus, we do not study the determination of the lump-sum tax under Confuianism. nstead, we fous on the total amount of surplus under Confuianism. 15

17 16 For a loal offiial, let the level of publi servie provided by all other loal offiials in the same distrit be i and the level of labor servie provided by all other loal offiials be i. Sine Confuianism emphasizes family value, here we assume the level of output produed in a distrit is shared equally among the m loal offiials. n eah distrit, total output is 1 ( i i and a loal offiial s share is m i i / ( 1. A loal offiial s ost of effort is / ( k, thus his payoff is 1 ( ( k m i i. (4 A loal offiial takes the levels of publi servie and labor servie provided by other loal offiials as given and hooses his own levels of publi servie and labor input to maximize his payoff (4. A loal offiial s optimal hoies of and require that 0 ( ( 1 1 k m i i, (5a 0 ( ( (1 k m i i. (5b Let a subsript of C denote the equilibrium variables under Confuianism. n a symmetri equilibrium, loal offiials provide the same level of publi servie and the same level of labor input. Thus equations (5a and (5b beome the following two equations showing that the levels of publi servie and labor input provided by a loal offiial derease with the ost of effort of a loal offiial: 0 ( 1 1 C C C C k m, (6a 0 ( (1 C C C C k m. (6b From equations (6a and (6b, the level of publi servie and the level of labor input of a loal offiial derease with the number of loal offiials in the same distrit. Thus under Confuianism, there is a free rider issue in the provision of inputs. Under Confuianism, the national level of surplus is 1 ( ( mk m m V. (7

18 Partial differentiation of (5a and (5b leads to V V L 1 1 ( ( k 0 m, (8a ( 1 ( ( k 0 m. (8b From (8a and (8b, under Confuianism, an inrease of the level of publi servie or labor input of a loal offiial will inrease total amount of surplus. That is, the level of publi servie and labor input of a loal offiial under Confuianism is lower than the first-best ase. 5.. Performane of the Legalism n this subsetion, we study the senario that the ruler uses the Legalism as the national strategy of governane. Under the Legalism, the ruler ould deal with a loal offiial diretly rather than through a ommunity. Suppose the ruler provides the following inentive mehanism for eah loal offiial: the ruler harges a fixed fee of z and provides a unit reward of w for eah unit of labor servie provided by a loal offiial. Sine a loal offiial is not rewarded for ontribution on publi servie, a loal offiial will provide the minimum level of publi servie g. For a loal offiial, his inome is w and his ost of providing g units of publi servie and units of labor is k( g /. A loal offiial hooses the level of labor input to maximize his net benefit k w ( g z. (9 A loal offiial s optimal hoie of labor input requires that w g. (10 k Let the reservation utility of a loal offiial be R. From (9 and (10, the net benefit of a w loal offiial is wg z. The ruler will hoose the fixed fee so that the payoff of a loal k offiial is equal to this offiial s reservation utility. As a result, the ruler sets the fixed fee equaling to w k wg R. Under the Legalism, the ruler s total revenue is the sum of output produed by 17

19 all distrits 1 ( m w mg and fixed fee olleted from all loal offiials m( w g R, k and his total ost is the sum of the ost of induing labor inputs building f (n. Thus the ruler s payoff is [ ( mg w k 1 m mw m( w g R] f ( n w and the ost of institution Plugging the level of labor input from (10 into the above expression, the ruler will hoose the level of reward w to maximize V L arg max ( mg w mw mg k 1 mw k. f ( n mr. (11 An appliation of the Envelope theorem on (11 reveals that the ruler s payoff dereases with the reservation utility of an individual. Thus if possible the ruler has an inentive to derease the reservation utility of a itizen. n this model, we have assumed that the reservation utilities of loal offiials to be exogenously given. This assumption an be motivated by arguing that there is a lowest limit of the level of utility for a itizen beause itizens might rebel if their utilities beome too low. Sometimes a itizen s reservation utility is not exogenously given and an be affeted by the poliies of the ruler. This observation is useful in understanding why the government adopted the Legalism approah in China s history tried to ontrol the ativities of itizens, suh as the restrition of areer hoies and the mobility of itizens under uan Zhong of the State of Qi. 19 Those kinds of restritions would derease the reservation utilities of itizens and the ruler s osts of providing inentives to itizens, and thus inrease the payoff of the ruler. The ruler s optimal hoie of w requires that w ( 1 g g w 0. (1 k An inrease of means that the role of publi servie in the prodution of output inreases. The following proposition studies the impat of a hange of the share of publi good in the prodution of output on the inentive provided to a loal offiial. 19 Restrition of the mobility of itizens was followed by other politial regimes, suh as Shang Yang of the State of Qin and the Ming Dynasty (

20 Proposition 3: Under the Legalism, dw / d 0 if and only if ( 1 ln g 1 0. (13 w g k V Proof: From (11, L 0 if (13 is satisfied. Thus, if (13 is satisfied, V L is submodular w in w and. As a result, dw / d 0. When g is small, (13 is more likely to be satisfied. From Proposition 3, when the level of minimum publi servie is small, a ruler offers less inentive to labor servie provided by a loal offiial if the share of publi servie in the prodution of output inreases. The following proposition studies the impat of the level of the minimum level of publi servie on the ruler s hoie of inentives to loal offiials. Proposition 4: Under the Legalism, dw / dg 0. V Proof: Partial differentiation of (11 leads to L 0 wg and g. Thus, dw / dg 0.. Thus, V L is supermodular in w To understand Proposition 4, sine publi servie and labor input of a loal offiial are omplementary in the prodution of output, a higher level of minimum publi servie will inrease the marginal produt of labor servie and thus inreases a ruler s provision of inentives to a loal offiial Performane of ombinations of Confuianism and the Legalism n this subsetion, we study the senario that the ruler uses different ombinations of the Confuianism and the Legalism as a national strategy of governane. There are two ways to ombine Confuianism with the Legalism. First, suppose that the efforts of loal offiials are determined by the Confuianism approah, while the hoie of national offiials is determined by the Legalism approah. Under 19

21 this ombination of Confuianism and the Legalism, a loal offiial in a distrit hoose the levels of labor input and publi servie to maximize 1 ( k i Optimal hoies of and require that m i 1 m (1 m i ( i i ( ( 1 i. (14 k( 0, (15a k( 0. (15b A omparison of (5a and (5b with (15a and (15b reveals that a loal offiial provides higher efforts under this ombination of Confuianism and the Legalism than that under Confuianism. Let a subsript of CL denote the equilibrium variables under this ombination of Confuianism and the Legalism. For produed under this ombination is CL and CL defined in (15a and (15b, the national surplus V CL ( m CL ( m CL 1 f ( n. (16 Seond, suppose the levels of labor input and publi servie of a loal offiial are determined by the Legalism approah, while the hoie of national offiials is determined by the Confuianism approah. n China s history, this ombination of the two shools of thoughts was less ommon than the first ombination. n this ase, the ruler hooses the level of inentives to loal offiials to maximize his total surplus V LC 1 arg max mw mw ( mg w mg. (17 k k The ruler s optimal hoie of w requires that w ( 1 g g w 0. (18 k A omparison of (1 with (18 shows that the level of inentive provided to a loal offiial under this ombination of Confuianism and the Legalism is lower than that under the Legalism. 0

22 5.4. Comparison of Different Strategies of overnane n this subsetion, we ompare different national strategies of governane and disuss the onditions under whih a strategy would be optimal for the ruler. The following proposition ompares the marginal inentives for labor input under the Legalism and that under Confuianism. This proposition onfirms the traditional wisdom that the inentive provided to a loal offiial under the Legalism is stronger than that under Confuianism. Proposition 5: The marginal inentive provided to a loal offiial under the Legalism is stronger than that under Confuianism. Proof: Under Confuianism, from (5b, the marginal inentive to a loal offiial for eah additional unit of labor input is k. Under the Legalism, from (9, the marginal inentive ( to a loal offiial for eah additional unit of labor input is w k( g. We want to show that g if the Legalism is the best feasible strategy. f g, from (8a and (8b, sine the level of publi servie and the level of labor input are lower than those in the firstbest ase, for a given level of average ability of national offiials, the total surplus inreases if there is a swith to the Confuianism beause the total amount of inputs is higher and the alloation of inputs is unonstrained under Confuianism. From (7, (11, (16, and (17, the ruler s hoie of the national strategy of governane is affeted by various fators. First, when the ost of institution building is low ( dereases, the ruler will be more likely to use institutions in the seletion of national offiials. Seond, if the spread of the distribution of talents in soiety is suffiiently high ( inreases, the ruler will be more likely to use institutions in the seletion of national offiials. Third, when the minimum enforeable level of publi servie is high, the ruler will provide more inentives to loal offiials. Fourth and finally, when the number of administrative regions inreases, the ruler will be more likely to adopt formal institutions to selet national offiials. n China s history, rulers frequently used the first ombination of Confuianism and the Legalism (payoff in equation (16 as the national strategy of governane: loal affairs were handled by lans and government offiials above the ounty level were hosen mainly through examinations. This strategy would be the best feasible strategy when the level of minimum publi 1

23 servie was low and the number of administrative regions was high. This strategy would also be desirable from the following perspetive. We have assumed that eah individual is onerned with his own payoff only. Under the moral teahing of Confuianism, eah individual ould also are about the welfare of other relatives. With this hange of the preferenes of a loal offiial, the free-rider issue an be partly avoided and eah loal offiial would provide higher efforts. 6. Conlusion n this paper, we have studied a ruler s optimal hoie of the national strategy of governane in anient China in a formal model. Under Confuianism, sine loal offiials in the same distrit share loal output, there is a free rider issue. Also, sine national offiials are hosen through personal preferenes, most apable persons may not be hosen. Under the Legalism, the ruler provides inentives to loal offiials whih may lead to side effets. National offiials are hosen through formal institutions and more apable persons are more likely to be hosen. However, institution building is ostly. The old-blood image of the Legalism may alien itizens. By exploiting the paternalisti relationship between the ruler and the ruled under Confuianism and the strength of institution-building under the Legalism, the ruler may benefit from a ombination of Confuianism approah and the Legalism approah as the national strategy of governane. As eah strategy has its pros and ons, whih strategy of governane is optimal depends on fators suh as the minimum enforeable level of publi servie, and the level of institution building osts. n this paper, we have assumed that the eonomy has only one setor of prodution. When there are multiple setors of prodution, whether the ruler should provide inentives to offiials in a setor depend on the speifi features of this setor. Suppose there are a ivilian setor and a military setor. Compared with the ivilian setor, the ruler would be more likely to provide inentives to the military setor beause the tasks performed by the military setor would be simpler than the tasks performed by the ivilian setor: the main funtion of the military setor is to win a war while the funtion of the ivilian setor an be more ompliated and more diffiult to measure. Thus, a ruler may not provide strong inentives to ivilian offiials while at the same time he may provide strong inentives to military offiials.