Laurent Franckx () (K.U.Leuven, C.E.S., Energy, Transport and Environment, Royal Military Academy) Alessio d'Amato (Faculty of Economics, University of Rome Tor Vergata)
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This paper verifies the robustness of Dixit's claim that common agency problems in the public sector can be solved by restrictions on the incentive schemes that government agencies can develop for the subordinates of other departments. In our model, the outside principal (for instance, an environmental agency) offers side payments to the hierarchical superior of a public servant. As suggested by Dixit, the side payment is based only on the output that is of direct relevance for the outside principal (for instance, environmental quality). The hierarchical superior, however, can impose an enforceable effort allocation. We show that the outside principal will bribe the hierarchical superior to impose a zero effort level in the task that constitutes the core mission of his department, unless there exist both lower and upper limits to the transfers that can be made. Thus, without exogenous restrictions on side payments, common agency will lead to a collapse of the division of labor within government.
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Find related papers by JEL classification: D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights D62 - Microeconomics - - Welfare Economics - - - Externalities D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects H1 - Public Economics - - Structure and Scope of Government H79 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other H8 - Public Economics - - Miscellaneous Issues K00 - Law and Economics - - General - - - General (including Data Sources and Description) Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
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