An Incomplete Contracting Approach to Administrative Law

Abstract

Across areas of law, administrative agencies employ four basic policymaking strategies: rulemaking, adjudication, advance ruling, and licensing. How should administrative agencies choose among these policymaking strategies? I develop a model which captures the idea that rules are inherently incomplete, and focuses on the strategic interaction between agencies and firms. Unlike rulemaking, adjudication allows for a policy that is narrowly tailored to firms' circumstances. However, since adjudication takes place after firms have already acted, two time-inconsistency problems arise: the hold-up and the leniency problems. Advance ruling eliminates the hold-up problem, but not the leniency one. Licensing eliminates both problems, but only by requiring socially costly licenses even in cases where neither problem arises. Agencies' choice of policymaking strategy depends on firm heterogeneity and the social cost of preapproval procedures.