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Multiple-task common agency with one fully-informed principal: implications for public policy

Listed author(s):
  • 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)

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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Paper provided by KU Leuven, Department of Economics - Research Group Energy, Transport and Environment in its series Energy, Transport and Environment Working Papers Series with number ete0206.

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Length: 20 pages
Date of creation: Aug 2002
Handle: RePEc:ete:etewps:ete0206
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