Dynamic Incentives and the Optimal Delegation of Political Power
34 Pages Posted: 5 Apr 2005 Last revised: 10 Jun 2010
Date Written: November 1, 2006
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: Suggested Citation