Regulation as Delegation

Abstract

In diverse areas – from retirement savings, to fuel economy, to prescription drugs, to consumer credit, to food and beverage consumption – government makes personal decisions for us or helps us make what it sees as better decisions. In other words, government serves as our agent. Understood in light of Principal-Agent Theory (PAT) and Behavioral Principal-Agent Theory (BPAT), a great deal of modern regulation can be helpfully evaluated as a hypothetical delegation. Regulation as Delegation offers a new perspective on familiar objections to apparently paternalistic acts on government’s part, and suggests important distinctions among different kinds of hypothetical delegations. Different regulatory techniques map onto greater or lesser degrees of delegation. Government mandates (and bans) represent complete delegation. No regulation, leaving individuals to decide by themselves, corresponds to no delegation. In between, partial delegation techniques include default rules, which can be viewed as presumptive decisions by the agent subject to the principal’s veto power, and disclosure mandates, which assign an information acquisition role to the agent. BPAT recognizes distinctive roles for the government-agent. A sophisticated principal who is aware of her behavioral biases has more reason to delegate to a rational agent. But bounded rationality might also increase the risks of delegation, since an agent with misaligned interests can take advantage of the imperfectly rational principal. Shifting from personal decisions to public goods problems, we introduce the idea of reverse delegation, with the government as principal and the individuals as agents. Here the government as principal, as representative of the People, sets a public objective – a clean, sustainable environment, financial stability, higher educational attainment – and enlists individuals as agents to help attain this objective.