Patrick L. Warren

Optimal Agency Bias and Regulatory Review

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.

Cost Versus Control: Understanding Ownership Through Outsourcing in Hospitals

For-profit hospitals in California contract out services much more intensely than either private nonprofit or public hospitals. To explain why, we build a model in which the outsourcing decision is a trade-off between cost and control. Since nonprofit firms are more restricted in how they consume net revenues, they experience more rapidly diminishing value of a dollar saved, and they are less attracted to a low-cost but low-control outsourcing opportunity than a for-profit firm is. This difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when a fixed-cost shock raises the marginal value of a dollar of cost savings. We test these predictions in a panel of California hospitals, finding evidence for each and that the set of services that private non-profits are particularly interested in controlling (physician-intensive services) is very different from those than public hospitals are particularly interested in (labor-intensive services). These results suggest that a model of public or nonprofit make-or-buy decisions should be more than a simple relabeling of a model derived in the for-profit context.

State Parties and Taxes: A Comment on Reed in the Context of Close Legislatures

This note empirically analyzes how partisan control of a states legislature alters the growth of the states tax burden. Using two related empirical strategies, one based on instrumental variables using closely controlled legislatures and one based on regression discontinuity, I find large effects of partisan control, between two and four times as large as similar estimates by Reed (2006). Compared to Republican control, Democratic control of the legislature causes tax burden growth of more than a full percent point over a 5-year period, on a mean tax burden of about 10.7 percentage points. This difference is strong evidence for partisan divergence in this context.

Volunteer Militaries, the Draft, and Support for War

This paper models how a nations military manpower procurement system affects popular support for war and political choices regarding war. When citizens have idiosyncratic benefits from war and costs from serving, I characterize when a volunteer military maximizes support, and when a mixture of volunteer and conscripted forces does. Pure conscription never maximizes support. The personnel systems cannot be ranked ex-ante by efficiency, because each makes mistakes the other avoids. Ceteris paribus, political systems requiring only weak support to initiate wars have more war under pure conscription, while those requiring strong support have more war under a volunteer system.

Will Governments Fix What Markets Cannot? The Positive Political Economy of Regulation in Markets with Overconfident Consumers

In the behavioral industrial organization literature, market forces may not eliminate inefficiencies associated with biased consumers. Regulations usually exist that could, but we show that self-governing citizen-consumers will not always enact these welfare-improving policies. In a market for goods with add-ons, consumers never support regulations that would reduce consumption from inefficiently high levels. Even worse, consumer overconfidence reduces demand for regulation to correct a separate classical market failure, incomplete contracting. Consumer biases have two Effects: they produce deadweight losses, and they redistribute income away from biased consumers. The benefits of redistribution discourage regulation.

Regulatory Fog: The Informational Origins of Regulatory Persistence

Compared with other types of policy, regulation is very persistent, even when inefficient. We propose an explanation for regulatory persistence based on regulatory fog,the phenomenon by which regulation obscures information about the e ects of deregulation. We construct a dynamic model of regulation in which the underlying need for regulation varies stochastically, and regulation undermines the regulators ability to observe the state of the world. Compared to the full-information benchmark, regulation is highly persistent, often lasting inde nitely. The regulatory fog e ect is robust to a broad range of partially informative policies and can be quite detrimental to social welfare.