Optimal Agency Bias and Regulatory Review

Abstract

AbstractWhy do bureaucratic principals appoint agents who hold different policy views from themselves? We posit an explanation based on the interplay between two types of agency costs: shirking on information production and policy bias. Principals employ biased agents because they shirk less. This creates an incentive for the principal to use review mechanisms that mitigate the resulting bias in the agents’ decisions. The availability of such review mechanisms encourages principals to employ more extreme agents. We apply the theory to explain various features of the administrative state. In contrast to existing accounts, in our model the use by the president of ideological bureaucrats at regulatory agencies and centralized regulatory review are complements. The use of bias to mitigate shirking results in an amplification of the swings of regulatory policy and heightens the role of regulatory policy in partisan politics.