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How Delegation Improves Commitment

  • Grischa Perino

    ()

    (University of Heidelberg, Department of Economics)

We often use delegation as a commitment device if a government faces problems of timeinconsistency. McCallum (1995, AER P&P) challenged this practice, claiming that delegation merely relocates the commitment problem but does not solve it. In a model where delegation and specific policies are subject to the same commitment technology it is shown that McCallum’s conjecture holds if optimal ex-ante policies are fixed. However, with a flexibility-credibility trade-off delegation is both desirable and improves credibility. While delegation does not increase commitment per se it makes it more attractive and increases investments in credibility. Delegation can therefore serve as a valid commitment device.

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File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp466.pdf
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Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0466.

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Length: 10 pages
Date of creation: Jun 2008
Date of revision: Jun 2008
Handle: RePEc:awi:wpaper:0466
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  1. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
  2. Rodney D. Ludema & Anders Olofsgård, 2006. "Delegation versus Communication in the Organization of Government," Working Papers gueconwpa~06-06-04, Georgetown University, Department of Economics.
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  4. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, vol. 43(8), pages 1569-1593, August.
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  6. Paul Levine & John Stern & Francesc Trillas, 2005. "Utility price regulation and time inconsistency: comparisons with monetary policy," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 447-478, July.
  7. Alberto Alesina & Guido Tabellini, 2007. "Bureaucrats or Politicians? Part I: A Single Policy Task," Levine's Working Paper Archive 321307000000000870, David K. Levine.
  8. Daron Acemoglu, 2002. "Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics," NBER Working Papers 9377, National Bureau of Economic Research, Inc.
  9. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  10. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  11. Bennett T. McCallum, 1996. "Crucial Issues Concerning Central Bank Independence," NBER Working Papers 5597, National Bureau of Economic Research, Inc.
  12. H.J. Roelfsema, 2004. "Strategic Delegation of Environmental Policy Making," Working Papers 04-11, Utrecht School of Economics.
  13. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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