Delegation in sovereign wealth funds

Abstract

This paper models the incentives of a politician to delegate decisionmaking power in a sovereign wealth fund (SWF) to an independent external manager. I analyze in a repeated two-stage game whether the delegation is socially optimal and demonstrate under which circumstances it takes place. First, the politician decides whether to delegate. Second, based on his decision, two alternative subgames take place where output is produced and voters decide on reelection of the politician. I show that delegation increases the SWF's output. Two effects matter: First, the conflict of interests between politician and manager disciplines both players and allows voters to mitigate their informational problem. Second, as a consequence of management outsourcing and higher transparency, the SWF's average productivity improves. Less competent politicians are more willing to delegate as it improves their chances to be reelected. In general, the delegation is more likely if the quality of existing political and economic institutions is low.