Multiple Principals and Outside Information in Bureaucratic Policy Making

I examine a model in which a bureaucrat performs a project for multiple legislative principals. The cost of the project is publicly observable but the bureaucrat’s (exogenous) effeciency and (endogenous) cost reducing activities are not. The principals can each perform a costly audit of the bureaucrat’s type for use in the design of incentive schemes, and the information may also be useful for nonoversight activity. Due to information leakages between principals, the information about the agent obtained from one audit will benefit all principals. For some values of the audit costs, there is a collective action problem in auditing among the principals. Thus, for some model parameters the multiplicity of principals causes the level of this form of oversight to be suboptimal with respect to the principals’ joint utility. The collective action problem gets worse as the principals care more about oversight, and as the auditing technology becomes more effective. In addition, more effective oversight technologies can reduce the collective welfare of the principals.