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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 Holmstrˆm’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. Copyright (c) 2010 The Ohio State University.

Citation

Gauti B. Eggertsson & Eric Le Borgne, 2010. “A Political Agency Theory of Central Bank Independence,” Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 647-677, June.

@article{eggertsson2010political,
author = {EGGERTSSON, GAUTI B. and LE BORGNE, ERIC},
title = {A Political Agency Theory of Central Bank Independence},
journal = {Journal of Money, Credit and Banking},
volume = {42},
number = {4},
pages = {647-677},
year = {2010}
}