Publication: A Political Agency Theory of Central Bank Independence
No Thumbnail Available
Date
2010
ISSN
00222879
Published
2010
Author(s)
Editor(s)
Abstract
We propose a simple theory to explain why, and under what circumstances, a politician delegates policy tasks to a technocrat in an independent institution and then analyze under what conditions delegation is optimal for society. Our theory builds on Holmstrom's (1982, 1999) "hidden effort" principal-agent model. The election pressures that politicians face, and the absence of such pressures for technocrats, give rise to a dynamic incentive structure that formalizes two rationales for delegation, one highlighted by Hamilton (1788) and the other by Blinder (1998). 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 the whims of public opinion. A natural application of our framework suggests a new theory of central bank independence.
Link to Data Set
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Citations
Collections
Related items
Showing items related by metadata.
Publication Changes in Subjective Well-Being in Timor-Leste on the Path to Independence(2009)In countries emerging from ethnic and civil conflict, standard approaches to measuring trends in well-being do not account for the empowerment of the population due to the political liberalization, which is critical for the successful implementation of zero-generation reforms. They also fail to do justice to the often massive population displacement unleashed by the violence which makes a comparison of living standards from before to after the conflict problematic. Using the example of Timor-Leste, this paper demonstrates how subjective, objective, and recall information collected through a cross-sectional household survey can be combined to provide a rich profile of trends in well-being from the pre- to post-conflict stage. By differencing across pre- and post-conflict periods, the regression estimates are robust with regard to psychological attributes or other time-invariant personal traits. The analysis shows that the changes in self-rated welfare and power in Timor-Leste broadly corresponded to changes recorded by objective indicators of economic resources, economic shocks, and ethno-linguistic status.Publication Tokenism or Agency? The Impact of Women's Reservations on Village Democracies in South India(2008)There is increasing interest in whether improving the participation of women in government will lead to more gender equality. We test this with data collected from South India, using a natural experiment that randomly reserves one-third of all presidencies in democratically elected village councils (panchayats) for women candidates. Previous research has found that such "reservations" result in policy decisions that are closer to the preferences of women; qualitative research has argued, conversely, that it results in token appointments in which women are appointed by elites and are poorly educated and aged. We do not find evidence in favor of the tokenism hypothesis, finding that women leaders are drawn from the upper end of the quality distribution of women. However, we find that female leaders perform no differently than male leaders. Our results also indicate that institutional factors matter much more for women than for men: women perform better than men in situations in which they have more political experience and live in villages less dominated by upper castes.Publication The Politics of Service Delivery in Pakistan: Political Parties and the Incentives for Patronage, 1988-1999(2008)This paper examines the impact of the political party structure on the incentives for politicians to focus on patronage versus service delivery improvements in Pakistan. By analysing inter-provincial variations in the quality of service delivery in Pakistan, the paper argues that the more fragmented, factionalised, and polarised the party systems, the greater are the incentives for patronage, weakening service delivery improvements. Fragmentation and factionalism both exacerbate the information problems that voters have in assigning credit (blame) for service delivery improvements (deterioration), thereby creating the incentives for politicians to focus on targeted benefits. Polarisation, particularly ethnic polarisation, reduces the ability of groups to agree on the provision of public goods, again causing politicians to favour the delivery of targeted benefits.Publication Political Connections and Preferential Access to Finance: The Role of Campaign Contributions(2008)Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher stock returns than firms that did not around the 1998 and 2002 elections. This suggests that contributions help shape policy on a firm-specific basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank financing relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of this rent seeking over the two election cycles to be at least 0.2% of gross domestic product per annum.Publication The Political Economy of Village Sanitation in South India: Capture or Poor Information?(2010)Despite efforts to mandate and finance local governments' provision of environmental sanitation services, outcomes remain poor in the villages surveyed in the four South Indian states. The analysis indicates some key issues that appear to hinder improvements in sanitation. Local politicians tend to capture sanitary infrastructure and cleaning services for themselves, while also keeping major village roads reasonably well-served. Their decisions suggest, however, that they neither understand the health benefits of sanitation, nor the negative externalities to their own health if surrounding areas are poorly served. Our findings suggest that improving sanitary outcomes requires disseminating information on the public goods nature of their health benefits, as well as on the local government's responsibilities. It also requires putting public health regulations in place, along with measures to enable accountability in service provision.
Users also downloaded
Showing related downloaded files
No results found.