We characterize optimal contracts in a dynamic principal–agent model of joint production in which project opportunities are heterogenous, utility from these projects is nontransferable, and the agent has the option to quit the relationship at any time. To demand the production of projects that benefit her but not the agent, the principal must commit to produce projects that benefit the agent in the future. Production at all stages of the relationship is ordered by projects'
cost‐effectiveness, which is their efficiency in transferring utility between the principal and the agent: cost‐effective demands impose relatively low costs on the agent and cost‐effective compensation imposes relatively low costs on the principal. Over time, optimal contracts become more generous toward the agent by adding commitments to less cost‐effective compensation. In turn, because this new compensation cannot be profitably exchanged against less cost‐effective demands, the principal narrows the scope of her demands.
We develop a model of policy making with an endogenous bureaucracy. Parties choose platforms and ideologically differentiated citizens decide whether to enter the public sector anticipating the platforms that they may be asked to implement. Bureaucrats prefer to work on policies closer to their ideal, and voters judge the performance of an administration taking both politicians’ and bureaucrats’ actions into account. The model provides an equilibrium framework to study the emergence of partisan or neutral bureaucracies and their consequences for government performance. It shows how bureaucratic partisanship can develop in modern civil service systems; why political polarization and bureaucratic partisanship reinforce each other; why bureaucratic neutrality is associated with competitive elections; and why partisanship lowers government efficiency and increases output fluctuations. Our results yield a number of policy implications regarding political appointments, public sector wages, seniority benefits, and recruiting measures that raise the intrinsic motivation of bureaucrats.
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