Optimal Central Banker Contracts and Common Agency

This paper considers the contracting approach to centralbanking in a simple common agency model. We suggest thatcentral banker contracts that do not consider the possibilityof more than one principal existing are incomplete contracts.Such incomplete contracts can be a poor form ofmonetary policy delegation under common agency. We develop amodel with two principals – society (government) and ageneric interest group, whose objective conflicts withsociety’s ex ante preferences by incorporating an inflationarybias. We determine when the government-offered orinterest-group-offered contract dominates the central banker’sdecision. The results largely depend on whether theinterest-group-offered contract is written in terms of outputor inflation.     

Optimal central banker contracts and common agency: a comment

We explore a setting where the central bank is offered an incentive scheme by an interest group, in addition to the contract designed by the government. We prove that the inflation bias can be eliminated when principals do not cooperate and have different output or inflation objectives. These conclusions contrast with those of Chortareas and Miller (Public Choice 121:131–155, 2004). The reason is that our analysis takes into account the participation constraints of the central bank. We also show that, if principals cooperate, the inflation bias is eliminated when their output target is different but not when they disagree over the inflation objective.     

Central Banker Contracts, Incomplete Information, and Monetary Policy Surprises: In Search of a Selfish Central Banker?

Approaching monetary policy as a principal-agent problemprovides a useful framework for interpreting alternativedelegation schemes. In this paper, we consider theeffectiveness of central banker incentive schemes when theprincipal delegates monetary policy through contracts butremains uncertain about the central banker's responsiveness tosuch schemes. We adopt a simple principal-agent model andassume that the central banker's trade-off between socialwelfare and the incentive scheme is private information. Weconsider two types of central bankers; one who responds to theincentive scheme (``selfish'') and one who does not and onlycares about social welfare (``benevolent''). We demonstratethat when a benevolent central banker accepts a contractdesigned for a selfish central banker, positive inflationsurprises occur and output exceeds its natural rate. Wefurther show that a benevolent central banker with aninflation bias has an incentive to masquerade as selfish.Mechanisms exist that solve that problem by achievingpreference revelation. We consider a simple mechanism indominant strategies that induces the benevolent type eithernot to breach or not to accept the appointment (contract) inthe first place. This multi-period mechanism works with eitherinflation targets, or the appointment of a conservativecentral banker. Our results suggest that more complicatedincentive schemes, embedded within broader constitutionalarrangements, are required in the presence of privateinformation for them to work effectively.     

The Walsh contract for central bankers proves optimal after all!

A recent paper argues that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract (Candel-Sánchez & Campoy-Miñarro, 2004). This result relies on assuming that the participation constraint does not represent an effective constraint on the central banker’s decision. We show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract, assuming that the participation constraint holds.     

Saying versus doing: a new donation method for measuring ideal points

Scaling methods pioneered by Poole and Rosenthal (Am J Polit Sci 29(2):357–384, 1985) redefined how scholars think about and estimate the ideologies of representatives seated in the US Congress. Those methods also have been used to estimate citizens’ ideologies. Whereas studies evaluating Congress typically use a behavioral measure, roll call votes, to estimate where representatives stand on the left-right ideological spectrum, those of the public most often have relied on survey data of stated, rather than revealed, preferences. However, measures of individuals’ preferences and, accordingly, estimates of their ideal points, may differ in important ways based on how preferences are elicited. In this paper, we elicit the same individuals’ preferences on the same 10 issues using two different methods: standard survey responses measured on a Likert scale and a donation exercise wherein individuals are forced to divide $1.50 between interest groups with diametrically opposed policy preferences. Importantly, expressing extreme views is costless under the former, but not the latter, method. We find that the type of elicitation method used is a significant predictor of individuals’ ideal points, and that the elicitation effect is driven primarily by Democratic respondents. Under the donation method, the ideal points of Democrats in the aggregate shift left, particularly for those Democrats who are politically engaged. In contrast, wealthy Democrats’ ideal points shift to the right. We also document effects for Republicans and Independents and find that overall polarization is similar under both elicitation methods. We conclude with a discussion of our results, and the consequences and tradeoffs of each elicitation method.     

When does the multiple principals hypothesis hold? The politics of U.S. agency policymaking autonomy

When the bureaucracy's political principals hold different preferences for policy, does this increase the bureaucracy's policymaking autonomy? Existing theory strongly suggests “yes.” We, however, argue that this pattern will materialize only when the bureaucracy's principals are all on the same side of the political divide. (i.e., unified government). Using data gathered from the American states at two time points, we capture preference divergence by measuring the ideological distance between the bureaucracy's key political principals—legislators, governors, and courts—on the common left–right dimension. We measure policymaking autonomy through multi-faceted surveys of state agency leaders. In keeping with our argument, we demonstrate that greater preference divergence across the bureaucracy's principals is associated with increased agency policymaking autonomy under unified—but not under divided—government. The results shed new light on when, and why, the bureaucracy's political principals may provide an oversight check on the policymaking power of the modern administrative state.     

The survival of interest groups: evidence from Germany

Abstract

Interest groups are important intermediary organisations that function as a transmission belt between societal interests and political decision-makers. However, while some interest groups survive over decades, others only last a few years. This article argues that the survival of interest groups depends on their ability to mobilise resources which is crucially affected by interest group type and the public salience of an interest group’s policy domain. The theoretical expectations are tested based on a novel dataset mapping the survival of 1699 interest groups registered at the German Bundestag between 1974 and 2012. Using event history analysis, it is shown that interest group type and public salience indeed affect whether interest groups survive. Sectional groups last significantly longer than cause groups, and interest group survival increases with the public salience of their policy area. The results have major implications for our understanding of interest groups and political representation in contemporary democracies.     

Reconceptualizing European Union regulatory networks: A response to Blauberger and Rittberger

This article responds to Michael Blauberger and Berthold Rittberger's article “Conceptualizing and theorizing EU regulatory networks,” published in Regulation & Governance in 2015. Blauberger and Rittberger challenged our previous work on the politics of Eurocracy, disputing our argument that political considerations, not functional ones, explain the choice of bureaucratic structure in the European Union (EU). Blauberger and Rittberger suggest that functional considerations do indeed explain why policymakers sometimes prefer governance through European Regulatory Networks rather than through more centralized EU agencies, and argue that we have misunderstood the preferences of EU legislative principals. In this article, we argue that there are significant flaws in Blauberger and Rittberger's analysis on both theoretical and empirical grounds. We show that a proper interpretation of developments in both telecoms and competition lends support to our theoretical claims and not those offered by Blauberger and Rittberger.     

The ‘Old’ and ‘New’ Political Economy of Hedge Fund Regulation in the European Union

The traditional literature on interest group behaviour presumes that private interests develop lobbying strategies based on the principle of effective allocation of resources. However, nearly 400 private interest groups actively lobby the Council of Europe, a classical intergovernmental organisation with weak decision-making powers, where no significant policy pay-off is expected to occur. This analysis aims to explain the seeming puzzle of private interest groups seeking to influence an institution which is generally perceived as having no strong decision-making powers in European political space. It does so by exploring three explanations from the existing literature, namely ‘policy overlap’, ‘venue shopping’ and ‘epistemic community’, and considers another explanation not hitherto fully developed, suggesting that the ‘ideological motivation’ of interest groups helps to explain their behaviour. Taking the ideological motivation of interest groups into account when analysing lobbying strategies can in fact shed light on certain lobbying preferences that would otherwise appear to defy the logic of interest representation. This paper therefore suggests that an ‘ideological motivation’ explanation potentially plays a crucial role in the analysis of the behaviour of any interest group.     

Lobbying and asymmetric information

Informational lobbying — the use by interest groups of their (alleged) expertise or private information on matters of importance for policymakers in an attempt to persuade them to implement particular policies — is often regarded as an important means of influence. This paper analyzes this phenomenon in a game setting. On the one hand, the interest group is assumed to have private information which is relevant to the policymaker, whilst, on the other hand, the policymaker is assumed to be fully aware of the strategic incentives of the interest group to (mis)report or conceal its private information. It is shown that in a setting of partially conflicting interests a rationale for informational lobbying can only exist if messages bear a cost to the interest group and if the group's preferences carry information in the ‘right direction’. Furthermore, it is shown that it is not the content of the message as such, but rather the characteristics of the interest group that induces potential changes in the policymaker's behavior. In addition, the model reveals some interesting results on the relation between, on the one hand, the occurrence and impact of lobbying and, on the other hand, the cost of lobbying, the stake which an interest group has in persuading the policymaker, the similarity between the policymaker's and the group's preferences, and the initial beliefs of the policymaker. Moreover, we relate the results to some empirical findings on lobbying. qu]Much of the pressure placed upon government and its agencies takes the form of freely provided “objective” studies showing the important outcomes to be expected from the enactment of particular policies (Bartlett, 1973: 133, his quotation marks). qu]The analysis here is vague. What is needed is an equilibrium model in which lobbying activities have influence. Incomplete information ought to be the key to building such a model that would explain why lobbying occurs (information, collusion with decision makers, and so on) and whether lobbying expenses are socially wasteful. (Tirole, 1989: Ch. 1.3, p. 77, Rentseeking behavior).     

Governing the future: the European Central Bank’s expectation management during the Great Moderation

Abstract

The experience of the global financial crisis has sparked renewed interest in the role of futurity in the capitalist economy in general and in the formation and coordination of expectations under uncertainty in particular. Economic sociologists have carefully studied the ‘defuturizing’ technologies devised by private actors, but have tended to neglect the increasingly pivotal part played by central banks. Political economists have had more to say on central banks, but have focused on institutional issues rather than on the concrete practices of central banking. Making an original contribution to both literatures, this paper traces the construction and subsequent evolution, up to 2007, of the European Central Bank’s communicative apparatus. Drawing on official documents and on interviews with both ECB staff and market participants, the paper shows how this apparatus created the conditions for the formation and coordination of private sector expectations. The insights from this empirical analysis into the performative dimensions of ‘credibility’ and ‘knowledge’ in monetary governance contribute directly to ongoing debates about the recent extension of the ECB’s communicative apparatus through forward guidance and quantitative easing.     

What Do Bureaucrats Like Doing? Bureaucratic Preferences in Response to Institutional Reform

How do bureaucrats respond to administrative reform in relation to their overall administrative goals? The authors test the bureau‐shaping thesis, which holds that bureaucrats’ preferences for certain kinds of roles and tasks motivate their support for bureau reform. Drawing on attitudinal and behavioral data from a survey of English local government officials, the findings underscore how bureaucrats with different interests and motivations sort themselves into job types. Their preferences drive support for reform, which, in turn, strengthens the executive structure of English local government. Drawing on the literature on bureaucratic responses to institutional reform, the authors offer a more nuanced portrayal of bureaucratic preferences in line with the bureau‐shaping model. A key conclusion: political principals need improved empirical awareness of bureaucratic preferences when undertaking public institutional reforms.     

La Grande Nation and Agriculture: The Power of French Farmers Demystified

France is considered a strong state, but French governments have always fiercely defended the interests of French farmers in European and global negotiations. Why would a ‘strong state’ be unable to resist farm lobby pressure? Is agriculture an exception to the French ‘strong state’ rule? This article offers a structural model of varying state sensitivity to interest group pressure, and argues that farm lobby pressure cannot fully explain French foreign policy on agriculture, as governments often go against farmers' preferences and as the level of pressure varies more than the continuity of governmental preferences. From an analysis of the negotiations on the CAP and the GATT in the 1960s and in the 1990s it emerges that ideational constraints played a major role in French obstinacy. The defence of French identity as La Grande Nation, necessitating a presence in world agricultural markets, and the defence of a strong Europe under French leadership as a counterweight to the United States, have guided French preferences without regard to the farmers' positions.     

Are they listening? Public opinion,interest groups and government responsiveness

What is the role of interest groups in the transmission of issues between the public and government policy? While government responsiveness to voters has received widespread scholarly attention, little is known about the role of interest groups in the transmission of public opinion to government. It is argued here that interest groups importantly influence government responsiveness to public opinion, but that the effect varies by type of interest group: while cause groups increase the responsiveness of governments to their electorate, sectional groups decrease government responsiveness. Drawing on a new and unique dataset, this article examines the relationship between public opinion, interest groups and government expenditure across 13 policy areas in Germany from 1986 until 2012 and shows that interest groups indeed have a differential effect on the responsiveness of governments. The article’s findings have important implications for understanding political representation and the largely overlooked relationship between public opinion, interest groups and government policy.     

The Gordon Brown Problem: New Labour and the Two ‘Adam Smiths’

As is well known, New Labour is often presented as an alternative to the conventional preferences of the left and right in British politics. Less commented upon is Gordon Brown's self‐conscious appeal to the thought of Adam Smith in doing so. Brown claims to have rescued Smith from those on the right that interpret his ‘invisible hand’ metaphor from The Wealth of Nations to represent dogmatic advocacy of free markets. Rather than interrogate this view, Brown attempts to complement it with the ‘helping hand’ that Smith supposedly proffers in The Theory of Moral Sentiments, in order to stress New Labour's resolution of ‘enterprise and fairness.’ I argue that Brown instead reiterates the academically discredited Adam Smith Problem, in which the moral ‘Smith’ is deemed subordinate to the economic ‘Smith,’ and that his use of these erroneous characterisations highlights his commitment to a set of preferences usually associated with the right.     

Majority representation and legitimacy: Survey-experimental evidence from the European Union

What can policy makers do in day-to-day decision making to strengthen citizens' belief that the political system is legitimate? Much literature has highlighted that the realization of citizens' personal preferences in policy making is an important driver of legitimacy beliefs. We argue that citizens, in addition, also care about whether a policy represents the preferences of the majority of citizens, even if their personal preference diverges from the majority's. Using the case of the European Union (EU) as a system that has recurringly experienced crises of public legitimacy, we conduct a vignette survey experiment in which respondents assess the legitimacy of fictitious EU decisions that vary in how they were taken and whose preferences they represent. Results from original surveys conducted in the five largest EU countries show that the congruence of EU decisions not only with personal opinion but also with different forms of majority opinion significantly strengthens legitimacy beliefs. We also show that the most likely mechanism behind this finding is the application of a ‘consensus heuristic’, by which respondents use majority opinion as a cue to identify legitimate decisions. In contrast, procedural features such as the consultation of interest groups or the inclusiveness of decision making in the institutions have little effect on legitimacy beliefs. These findings suggest that policy makers can address legitimacy deficits by strengthening majority representation, which will have both egotropic and sociotropic effects.     

Sophisticated and myopic? Citizen preferences for Electoral College reform

Different institutions can produce more (or less) preferred outcomes, in terms of citizens’ preferences. Consequently, citizen preferences over institutions may “inherit”—to use William Riker’s term—the features of preferences over outcomes. But the level of information and understanding required for this effect to be observable seems quite high. In this paper, we investigate whether Riker’s intuition about citizens acting on institutional preferences is borne out by an original empirical dataset collected for this purpose. These data, a survey commissioned specifically for this project, were collected as part of a larger nationally representative sample conducted right before the 2004 election. The results show that support for a reform to split a state’s Electoral College votes proportionally is explained by (1) which candidate one supports, (2) which candidate one thinks is likely to win the election under the existing system of apportionment, (3) preferences for abolishing the Electoral College in favor of the popular vote winner, and (4) statistical interactions between these variables. In baldly political terms, Kerry voters tend to support splitting their state’s Electoral College votes if they felt George W. Bush was likely to win in that state. But Kerry voters who expect Kerry to win their state favor winner-take-all Electoral College rules for their state. In both cases, mutatis mutandis, the reverse is true for Bush voters.     

Dispersed communication by central bank committees and the predictability of monetary policy decisions

The paper asks whether members of central bank decision-making committees should communicate with the public in a collegial manner, by conveying the consensus or majority view of the committee, or in an individualistic way, by providing the diversity of views among the committee members. It finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly. This effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market’s prediction errors of FOMC policy decisions. Moreover, more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates. These findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication.     

Why is there a seniority system? To solve an agency problem

It is generally recognized that principals and agents both have an incentive to minimize shirking, and that this is often accomplished by entering into long term relationships in which the agent is offered rewards that increase with seniority. This paper considers that the congressional seniority system may exist as a means of insuring that representatives (agents) are faithful to the demands of constituents (principals). The unique feature of the seniority system, that tenure is rewarded with increasing power rather than increasing pay, is explained as a consequence of the need for each group to make credible commitments to the other. Rules changes adopted by the House of Representatives in the mid 1970s are used to test the impact of alternative rules on election outcomes.I wish to thank Mark Crain, Thomas Fomby, John Lott and Philip Porter for their comments.     

Gender Congruence and Work Effort in Manager–Employee Relationships

This article uses data on public school teachers and principals to examine whether teachers who share the gender of their principal work more overtime hours than teachers who do not. Findings show that gender congruence is associated with overtime hours for female teachers but not for male teachers. This result holds between schools and within schools: female teachers with female principals work more overtime hours than female teachers with male principals, and female teachers with female principals work more overtime hours than male teachers who work in the same school, for the same female principal. In light of multiple competing explanations for this finding, the author explores why gender congruence matters for female teachers but not for male teachers.

Practitioner Points

• Female teachers with female principals work more overtime hours than female teachers with male principals.
• Female teachers with female principals work more overtime hours than male teachers who work in the same schools, for the same female principals.
• Gender congruence is not associated with overtime hours among male teachers.
• Female teachers’ overtime hours are associated with female principals’ overtime hours, suggesting that female teachers emulate female principals’ work behavior.