Optimal Retention in Agency Problems

To elect or to appoint? Bias, information, and responsiveness of bureaucrats and politicians

“…Ferejohn (1986) formalizes a similar idea within a moral-hazard framework (voters' payoffs depend on the -unobservable, costly -effort exerted by the politician), and derives the optimal retrospective voting rule. Banks and Sundaram (1998) study the optimal retention rule for voters in a model that incorporates both moral hazard and adverse selection. Canes-Wrone, Herron, and Shotts (2001) consider a model in which elected officials have the same preferences as the electorate, and the incumbent attempts to signal talent (e.g., more precise information).…”

“…Bureaucrats are motivated by career concerns: they want to increase their perceived ability, to improve as much as possible their external professional prospects. As in Ferejohn (1986), or Banks and Sundaram (1998), effort is unobservable, and interacts with ability (additively) to produce outcomes. Alesina and Tabellini (2007) conclude that bureaucrats are preferred in technical tasks for which ability is more important than effort, or when there is large uncertainty about whether the policymaker has the required abilities to fulfill her task.…”

Decentralization and electoral accountability: Incentives, separation and voter welfare

“…In the literature, this term is used in rather a broad sense, and refers to constraints on the rent-seeking activities of o±ce holders, such as diverting rents from the public purse, taking bribes, favouring of particular interest groups, and insu±cient innovation and e®ort. Interestingly, in this case, the lead has been taken by empirical researchers: there are now a number of cross-sectional and panel studies that show that across countries, measures of¯scal decentralization are generally negatively correlated with low accountability outcomes, such as corruption and poor governance, 5 although there are some dissenting 1 For more details on country decentralization programs, and the World Bank's view of the costs and bene¯ts, see http://www1.worldbank.org/publicsector/decentralization/, or World Bank (2000). 2 For recent reviews of the advantages of decentralization, see Azfar et (2001), Oates (1999) and McKinnon and Nechyba (1997).…”

“…Oates (1988). 5 See among others Huther and Shah(1998), Fissman and Gatti(2002), Mello and Barenstein(2001).…”

“…The type of the challenger is also determined by 8 it is remarkable that the complete contracting principal-agent theory also ignores the selection e®ect to consider only incentives. One notable exception is Banks and Sundaram (1998) who study the optimal retention rule in agency problems, and show that in equilibrium the chosen retention rule disciplines the agents (incentive e®ect) and the retained agents are more productive on average (selection e®ect). random draw.…”