A Political Agency Theory of Central Bank Independence

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 Holmstrom's (1982, 1999) "hidden effort&...

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Bibliographic Details
Main Authors:	Eggertsson, Gauti B., Le Borgne, Eric
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D720 Asymmetric and Private Information D820 Central Banks and Their Policies E580
Online Access:	http://hdl.handle.net/10986/5680

id	okr-10986-5680
recordtype	oai_dc
spelling	okr-10986-56802021-04-23T14:02:23Z A Political Agency Theory of Central Bank Independence Eggertsson, Gauti B. Le Borgne, Eric Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D720 Asymmetric and Private Information D820 Central Banks and Their Policies E580 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 Holmstrom'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. 2012-03-30T07:34:00Z 2012-03-30T07:34:00Z 2010 Journal Article Journal of Money, Credit, and Banking 00222879 http://hdl.handle.net/10986/5680 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D720 Asymmetric and Private Information D820 Central Banks and Their Policies E580
spellingShingle	Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D720 Asymmetric and Private Information D820 Central Banks and Their Policies E580 Eggertsson, Gauti B. Le Borgne, Eric A Political Agency Theory of Central Bank Independence
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	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 Holmstrom'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.
format	Journal Article
author	Eggertsson, Gauti B. Le Borgne, Eric
author_facet	Eggertsson, Gauti B. Le Borgne, Eric
author_sort	Eggertsson, Gauti B.
title	A Political Agency Theory of Central Bank Independence
title_short	A Political Agency Theory of Central Bank Independence
title_full	A Political Agency Theory of Central Bank Independence
title_fullStr	A Political Agency Theory of Central Bank Independence
title_full_unstemmed	A Political Agency Theory of Central Bank Independence
title_sort	political agency theory of central bank independence
publishDate	2012
url	http://hdl.handle.net/10986/5680
_version_	1764395934015291392

A Political Agency Theory of Central Bank Independence

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