Abstract
Consider a principal who sets a budget that the agent allocates among different services. Because the preferences of the agent may differ from those of the principal, the budget the principal sets can be lower or higher than in the first-best solution. When the principal is uncertain about the agent’s preferences, the agent may choose an allocation that signals his type, thereby affecting the size of the budget the principal will set in the following period. The equilibrium may have separation or pooling. In a pooling equilibrium, the agent may mis-represent his preferences, aiming to get a large budget in the future period.
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Notes
- 1.
For a selective review of research on the existence and the effects of prosocial behavior among individuals working in public organizations, see Polidori and Teobaldelli (2013).
- 2.
It follows from the discussion in Sect. 4.2.1 that m A = 0 should hold in equilibrium.
- 3.
We used the data until 2000 because the definition of some categories changed after that fiscal year. We excluded two categories because: one was subject to changes of definition during the period from 1985 to 1999, and the other is miscellaneous.
- 4.
We thank Nobuo Akai and Takero Doi for this example.
- 5.
The budgets for FY2009 were large, to address the effects of the Lehman shock.
- 6.
The new administration abolished fiscal caps in drawing up the FY2010 budget. It motivated each spending ministry to require increased budgets. Accordingly, fiscal caps were restored next year.
- 7.
Spending for post-disaster recovery projects is excluded.
Abbreviations
- p i :
-
Marginal cost of service i
- v(⋅ ):
-
Utility from consumption of a service
- \( \overline{X} \) :
-
Budget set by the principal
- x i :
-
Quantity of service i provided
- \( {x}_{ti}^k \) :
-
Choice of service i in period t by a type-k agent in the absence of signaling considerations
- \( {x}_{ti}^{k\ast } \) :
-
Optimal choice of service i in period t by an agent of type k when signaling considerations are present
- \( {x}_i^P \) :
-
first-best allocation for the principal of service i
- \( {\overline{X}}^{\ast } \) :
-
first-best level of the budget which the principal would give the agent when their preferences are the same
- \( \overline{Y} \) :
-
Principal’s endowment in each period
- α A :
-
Parameter describing preferences of the agent
- α P :
-
Parameter describing preferences of the principal
- π L :
-
Prior probability that \( {\alpha}_A={\alpha}_L \)
- \( {{ ilde }{\pi}}_L \) :
-
Posterior probability that agent is of type-L, or has \( {\alpha}_A={\alpha}_L \)
- \(\tilde{q}_{L}\) :
-
Posterior probability that \( {p}_2={p}_L \)
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Acknowledgements
The authors thank Nobuo Akai, Takero Doi, Keisuke Hattori, Toshihiro Ihori, Shintaro Nakagawa, Shuhei Shiozawa, Shinichi Suda, and the seminar participants at Keio University and at the University of California, Irvine, for helpful comments and suggestions. In particular, comments by Keisuke Hattori on our Figs. 7.1, 7.2, 7.3 were most helpful in revising our graphical presentation. Financial support by the Seimeikai Foundation and a Grant-in-Aid for Scientific Research from the Ministry of Education, Culture, Sports, Science and Technology are gratefully acknowledged.
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Comment Paper to Chapter 7
Comment Paper to Chapter 7
Keisuke Hattori
Osaka University of Economics, 2-2-8, Osumi, Higashiyodogawa, Osaka, Japanemail: hattori@osaka-ue.ac.jp
This chapter constructs a principal–agent model of delegation, in which a principal sets a budget that an agent then allocates between two different public services (“good” or “bad” services from the principal’s point of view). It investigates (i) how differences in preferences between the principal and agent affect the size of the budget that the principal sets, and (ii) how the agent behaves to obtain a larger budget when the principal is uncertain about the agent’s preferences.
The following results are obtained using plausible assumptions regarding preferences: (i) the more divergent the preferences of the principal and agent, the larger the budget that the principal tends to give the agent, and (ii) the agent has strategic incentives to obtain a large budget. Regarding this latter, it is further determined that in a separating equilibrium, an agent who prefers bad services spends much more on bad services in a manner that an agent preferring good services would not want to mimic. In a pooling equilibrium, however, even an agent who prefers good services mimics the bad agent and inefficiently spends on bad services.
The basic signaling model is extended by incorporating asymmetric information regarding the cost to provide each service. It is shown that, in a pooling equilibrium, an agent who has low (high) marginal costs of good (bad) services will behave as if he/she has high (low) marginal cost of good (bad) services to elicit a larger budget from the principal.
The authors stress the importance of asymmetric information regarding agent’s cost for providing public services for explaining increased government expenditure in Japan, but I believe that it is equally possible that the asymmetric information regarding agent preferences has the same importance as that of agent’s cost. For example, a national government prefers welfare services to road maintenance services but a local government prefers the opposite, which may cause an inefficient allocation of government expenditure. Furthermore, differences in preferences for some public services between national and local governments may be due to positive or negative externalities of local public services (e.g., libraries, sewer systems, parks, and city streets). On this point, the authors can also connect their ideas to the “decentralization theorem” by Wallace Oates. In addition, I would like to know how the national subsidy to local governments for providing good services affects inefficiency in delegation.
I found the analysis very interesting and thought provoking even in the perfect information setting. In addition, I believe that the model can be applied to budget allocation problems within firms, organizations, and families, all of which await future research.
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Terai, K., Glazer, A. (2015). Budgets Under Delegation. In: Ihori, T., Terai, K. (eds) The Political Economy of Fiscal Consolidation in Japan. Advances in Japanese Business and Economics, vol 8. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55127-0_7
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