Tim Büthe
Delegation of Regulatory Authority as a Dynamic Principal-Agent Problem
 
This project is directly motivated by two questions which my work on institutional complementarity raised but did not answer:  (1) What gives private rule-makers their autonomy vis-à-vis the government, even if it is often governments that delegate regulatory authority to them in the first place?  (2) Why do domestic institutions persist even when they put a country at an economic disadvantage internationally?  These questions led me to examine more generally the delegation of public authority and the development of such "principal-agent" relationships over time.  Here, I build on Principal-Agent Theory, which provides an analytical framework that has proven useful for the study of delegation across the empirical subfields of Political Science.
Conceptualizing delegation of authority as the intentional and revocable authorization of an "agent" to act on behalf of a "principal," P-A theory allows me to distinguish systematically between different reasons for why governments may delegate regulatory authority and derive from it different expected levels of discretion.  For instance, delegating in order to shift responsibility (or blame for policies that may prove unpopular) requires granting a higher level of discretion than delegating to increase efficiency through the division of labor.  P-A theory also explains what institutional arrangements a principal may employ to minimize the extent to which the agent will act contrary to the principal's interests.  Yet, principals frequently delegate even when such behavior may seem predictable, and principal-agent relationships often persist for a long time after the agent shirks—but then experience sudden change, such as when the principal drastically changes the terms of the delegation or replaces the agent.  These patterns cannot be explained while maintaining the customary, if often implicit, assumption that the principal's ability to monitor and the agent's propensity to shirk are fixed.
To explain institutional persistence and change in principal-agent relationships, I introduce a dynamic element into P-A theory.  I argue that the initial decision to delegate creates incentives for further specialization by both principal and agent in order to benefit from their division of labor.  Moreover, the delegation of regulatory authority to a particular agent leads other actors to make "specific investments" in this particular institutional arrangement, such as when firms learn how to lobby a particular regulatory agency.  Both of these developments increase the political and economic costs of re-contracting and thus agent discretion over time.  Major institutional change, where the principal re-appropriates authority or replaces the agent, might still occur, but only if an exogenous shock reveals additional information about the extent to which the agent has diverged from the principal's intent or increases the benefits that the principal can attain from costly institutional change.  The argument explains why principals often appear to suddenly discover long-accumulated increases in agent discretion, and why we may see long periods of seeming institutional stability followed by sudden, major change.
I developed the main theoretical ideas at the heart this project in the summer and fall of 2004.  Parts of this argument then became the theoretical section of two co-authored papers (published in Governance and in Law and Contemporary Problems).  I have subsequently elaborated the argument further and then explored its empirical applicability in several case studies of the evolution of principal-agent relationships, each of which starts with the delegation of public authority, often to a non-governmental regulatory body.  I intend to expand the theoretical discussion and several of the case studies into a book, focused on the institutional development of private corporate financial reporting regulation in the United States since 1934.
Tim Büthe.  "The Dynamics of Principals and Agents: Institutional Persistence and Change in U.S. Financial Regulation, 1934-2003."  Unpublished manuscript, Duke University, 2004-2010.
Walter Mattli and Tim Büthe.  "Accountability in Accounting? The Politics of Private Rule-Making in the Public Interest."  Governance vol.18 no.3 (July 2005): 399-429.
Walter Mattli and Tim Büthe.  "The Globalization of Health and Safety Standards:  Delegation of Regulatory Authority in the SPS-Agreement of the 1994 Agreement Establishing the World Trade Organization."  Law and Contemporary Problems vol.68 no.3-4 (Summer/Autumn 2008): 225-262.
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