Giving Advice vs. Making Decisions: Transparency, Information, and Delegation

We generalize standard delegation models to consider policymaking when both information and authority are dispersed among multiple actors. In our theory, the principal may delegate partial authority to a privately-informed agent while also reserving some authority for the principal’s use after observing the agent’s decision. Counterintuitively, the equilibrium amount of authority delegated to the agent is increasing in the preference divergence between the principal and agent. We also show that the amount of authority delegated depends upon whether the agent can observe the principal’s own private information (a condition we refer to as “top-down transparency”): this form of transparency increases the authority that must be delegated to the agent to obtain truthful policymaking. Accordingly, such transparency can result in less-informed policymaking. Nonetheless, the principal will sometimes but not always voluntarily choose such transparency. Finally, we apply the results of the model to the Financial Industry Regulatory Authority (FINRA). We gratefully acknowledge multiple helpful conversations with Maggie Penn, the comments and suggestions of three anonymous reviewers, and feedback from seminar audiences at the University of Chicago, the University of Pittsburgh, and Washington University in St. Louis. All remaining errors are our own. †Charles & Louise Travers Department of Political Science, University of California, Berkeley. Email: [email protected]. ‡Department of Political Science and Center for New Institutional Social Sciences, Washington University in Saint Louis. Email: [email protected].