Delegation in politics The principal-agent literature is concerned with how one individual, the principal, can design a compensation system (a contract) which motivates another individual, his agent, to act in the principal’s interests (Stiglitz). Def. Delegation (Lupia): an act where one person or group, called a principal, relies on another person or group, called an agent, to act on principal’s behalf Def. Agency relationship (Arrow): There are two individuals. One (the agent) must choose an action from a number of alternative possibilities. The action affects the welfare of both the agent and another person, the principal. The principal has the additional function of prescribing payoffs rules: before the agent chooses the action, the principal determines a rule that specify the fee to be paid to the agent as function of the principal’s observation of the results of the action.

Delegation in politics Def. accountability (Lupia): an agent is accountable to a principal if a principal can exercise control over the agent: more control, greater accountability. Def. Agency loss: difference between the actual consequence of delegation and what the consequence would have been had the agent been “perfect. Agency loss is zero when the agent takes actions that the principal would have taken given unlimited information and resources.(agent with the same preferences of the principal but with all necessary resources and skills) Def. Agency (delegation) success: if the outcome of delegation improves the principal’s welfare relative to what would have happened if the principal had chosen not to delegate. (status quo as reverse point)

Delegation in politics Every delegation involves at least a principal and an agent Many delegations entail the possibility of conflicting interests. (principal and agent do not share the same preferences) Many delegations contain the possibility of limited information. (principal and (more rarely) agent can be ignorant)

Romer and Rosenthal Delegation model The agent moves first by choosing whether or not to act. In the game the principal has already chosen to delegate. The principal reacts by accepting the action or rejecting it in favour of the status quo. A 1 0 X SQ Propose X  [0,1] P Accept X Reject X

SQ P=A SQAP PA PA A P = outcome

Equilibrium Outcome Agent position SQ P P Agency loss=0 2 P-SQ Agency loss P-SQ 2 P-SQ

Equilibrium Outcome Agent position SQ P P Agency loss=0 2 P-SQ Agency loss P-SQ 2 P-SQ

Comments to R.R. model Agency loss can grow when the agent’s ideal point policy or the status quo moves away from the principal’s ideal policy. Agency loss can grow with the distance between P and SQ because a “bad” status quo for the Principal makes a wider range of proposals attractive to the principal. Predicitions depend on two assumptions 1.Delegation is particularly large: principal can only accept or reject the agent’s action 2.Principal and agent have complete information

Incomplete information Information is incomplete when an actor is unable to predict the consequence of actions with certainty. Two kind of informations 1.Information about actions 2.Information about people and their context. When principals know less than agents two kind of problems 1.Moral Hazard with hidden actions (“Opportunity makes the thief” ) 2.Adverse selection (“Put the fox to guard the poultry”)

How Moral Hazard Affects Delegation (RR model) Ex.Complete informationIncomplete information best case Incomplete information worst case OutcomeAgency loss Outcome  Loss Outco me  Loss 1PNoneP0SQ|P-SQ| 2A-|A-P|A0SQ|A-SQ| 3ε Closer to P than SQ -|SQ-P|- εSQεA|A-(|SQ-P|+ ε)| 4SQ-|SQ-P|SQ0A|A-SQ|

SQ P=A SQAP PA PA A P = outcome witf complete information= outcome with incomplete information, worst scenario = additional agency loss in case of i.c. = agency loss in case of c. c.

Adverse selection The agent is unwilling: the agent has preferences different from the preferences the principal thought he/she had The agent is unable.

How Institutions affect agency loss Institutional designs affect the provision of information to political principals 1.Ex ante mechanisms to deal with adverse selection problems 2.Ex post mechanisms to deal with moral hazard problems

Ex ante mechanisms: Screening Competition: when a principal forces potential agents to compete for the right to be his/her agent, he/she can induce the potential agents to reveal information about themselves. However the conditions that make such a competition reducing agency loss are: 1.It is easy to determine whether or not the agent can perform the task 2.Potential agents know their preferences and abilities 3.Potential agents know if the other potential agents know their preferences and abilities 4.It is relatively easy and costless for the principal to punish the agent for failing to accomplish the task ex post. Sometimes the skills required to win a competition are different from the skills required to be an effective agent

Ex ante mechanisms: Selection When an agent chooses an action that reveals to the principal a previously hidden personal characteristic. Ex. Diploma:

Ex ante mechanisms: Contract Design Principal can offer potential agents a menu of contracts to induce agents to reveal things about themselves. Problem of risk sharing: when structuring an agent’s incentives ex ante, a principal faces a trade-off between risk-sharing – which prevents the agent’s rewards from depending too strongly on observable outcomes- and incentives which induce the principal to condition the agent’s rewards on observable outcomes.

Ex post mechanisms Direct monitoring (“patrolling”) from the Principal Self reporting Third party testimony (fire alarms oversight) Institutional checks : instead of striving for an unbiased source of information a principal may do better obtaining biased reports from different agents who have conflicting interests.