Dynamic Incentives and the Optimal Delegation of Political Power

34 Pages Posted: 5 Apr 2005 Last revised: 10 Jun 2010

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Federal Reserve Bank of New York

Eric Le Borgne

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2006

Abstract

We propose a theory to explain why, and under what circumstances, a politician delegates policy tasks to a technocrat in an independent institution, and analyze under what conditions delegation is optimal for society. Our theory builds on Holmström's hidden effort principal-agent model. The election pressures faced by politicians, together with the absence of such pressures for technocrats, give rise to a dynamic incentive structure that formalizes two rationales for delegation, one advanced in the eighteenth century by Alexander Hamilton and the other in a 1998 work by Blinder. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) is better insulated from shifts in public opinion. A natural application of our framework leads to a new theory of central bank independence.

Keywords: central bank independence, elections, career concerns, learning-by-doing, pandering

JEL Classification: E58, E61, H11, J45

Suggested Citation

Eggertsson, Gauti B. and Le Borgne, Eric, Dynamic Incentives and the Optimal Delegation of Political Power (November 1, 2006). FRB of New York Research Paper Staff Report No. 205, Available at SSRN: https://ssrn.com/abstract=699481 or http://dx.doi.org/10.2139/ssrn.699481

Gauti B. Eggertsson (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Eric Le Borgne

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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