Person:

Stephenson, Matthew

We analyze the positive and normative implications of regulatory oversight when the policymaking agency can improve the quality of regulation through effort, but only some kinds of effort are observable by the overseer, and the overseer's only power is the ability to veto new regulation. Such oversight can increase the quality of agency regulation, but it also introduces inefficiencies—the agency underinvests in unobservable effort and overinvests in observable effort. Agencies have no incentive to conceal their activities from the overseer; the reforms that are likely to reduce inefficiency are therefore those that improve overseer expertise or lower the costs of agency disclosure, not those that compel disclosure. The normative implications depend on the relative severity of bureaucratic drift and slack problems. When slack is paramount, an overseer that is more anti-regulation than the agency or society improves social welfare, as long as it does not deter the agency from regulating entirely. When drift is paramount, oversight improves social welfare only when it deters regulation. In this case, regulatory oversight is weakly dominated by one of two alternatives: eliminating oversight or banning regulation.

The relationship between third-party contract enforcement and informal networks raises important sociological, political, and economic questions. When economic activity is embedded in social structures, what are the implications of third-party contract enforcement for the scope and nature of economic relations? What determines whether individuals rely on formal legal institutions or informal networks to sustain trade relationships? Do legal institutions erode informal networks? We develop a model in which a trade-off exists between size and sustainability of networks. By adding the possibility of fee-based, enforceable contracts, we provide a theoretical explanation for the coexistence of legal contract enforcement and an informal economy. We find that legal enforcement has little effect on networks until law becomes sufficiently inexpensive, at which point small decreases in the cost of law have dramatic effects on network size and the frequency of use of the legal system.