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  1. Delegation Dilemmas: Carlos Pereira, Michigan State University and FGV-SP Coalition Size, Electoral Risk and Regulatory Governance in New Democracies Legislative Studies Quarterly, XXXV, 1, February 2010

  2. Indexes of Autonomy of Regulatory Agencies

  3. Research problem • How to explain the great variability in the institutional designs of the state independent regulatory institutions? • What factors can account for the decision by governors to set up independent regulatory institutions with more or less autonomy?

  4. Larger project on Regulatory Governance • Regulatory Governance • Autonomy • Decision-making • Decision-tools • Control & Accountability • All regulatory agencies in Brazil (New Data) • The Quarterly Review of Economics and Finance 10 (10): 56-77, 2007.

  5. The Regulatory Process

  6. The Regulatory Governance Index and its Four Components *S=sewage, T=Telecommunications, W=water, E=electricity, Tr = transport, R=railroads, G=gas, I=irrigation, WTr=Water transport, GTr=Ground transport.

  7. Regulatory Governance Index

  8. Current explanations for institutional design and delegation of autonomy • Organizational isomorphism (March & Olsen) • Blame shifting (Fiorina) • Credibility gains (Levi & Spiller; Mueller & Pereira) • Informational gains (Krehbiel) • Preservation of Congress’s intertemporal preferences on the bureaucracy (McNollgast) • Political risk and uncertainty (Moe, Horn, Rui de Figueiredo) • Power parity among political coalitions (Geddes) • Transaction cost politics (Epstein & O’Halloran; Huber & Shipan) • Executive-legislative relations and presidential durability in power (Lewis)

  9. Literature’s Bias: • Most of the theoretical developments and empirical research have focused on US political institutions • Congress takes the initiative of delegating authorities to executive agencies. • How about the logic of delegation in multiparty coalition-based separation of power systems where, unlike the US, executives are the agenda setters, hold legislative powers, and have great ability to build majority coalitions by controlling the legislative agenda and dispensing pork and patronage to coalition members? • In Brazil, presidents and governors have the exclusive prerogative of initiating bills proposing the creation or closing of administrative agencies.

  10. Research questions • Conventional wisdom affirms that governors in Brazil are extremely powerful. • if governors’ power is truly constant across Brazil’s states, we should not see variation in bureaucratic autonomy. What explains this variation? • What is the relationship between elite’s electoral vulnerability, levels of delegation and institutional design? • How does political risk and uncertainty influence politicians’ choice about the degree of delegation and corresponding bureaucratic autonomy?

  11. Governors’ incentive structure Governors are the key actors and they have to decide: • whether or not to create a regulatory agency • How much autonomy/discretion to grant Where chief executives enjoy great legislative powers and control pork and patronage on a large scale, political competition is essentially driven by inter-elite competition for the gubernatorial position.

  12. The decision to create an agency • Gains from privatization: • inducements (loans and advancements) from federal government • Receive funds from federal regulatory agencies (convênios) • Losses: • Relinquish power over key bureaucratic structures • Agency costs • Context: • high levels of indebtment • reelection amendment

  13. Theory • The main reason why governors create autonomous institutions is the desire to tie the hands of future governors. • The smaller the political risks (and the more stable the political competition), the lesser the incentives for governors to grant administrative autonomy. • The stronger the political competition, the higher the probability that the agencies will be more autonomous. • The autonomy enjoyed by independent regulatory agencies could be interpreted as an inter-temporal safeguard for the preferences of the incumbent governor (or his elite group or faction).

  14. What do we mean by autonomy? • Refers to different objects (government and regulated firms): • Political: • tenure and staggered terms for regulators (not coincident with that of the executive) • legal means to enforce its decisions • appeals that are made to the judiciary (rather than to any executive body) • special prerequisites for appointing directors, such as technical qualifications and conflict-of-interest clauses • Financial • agency’s funds are not subject to impounding or appropriation for other purposes

  15. Measuring delegation: the autonomy index • Survey with 31 state regulatory agencies • high-level officials, most often the president or directors • Questionnaire composed of 26 questions • political autonomy (tenure of the directors, appointments, circumstances in which a director can be fired), • clarity of rules (information on instruments available for state governments to exert control over the agency, degree of delegation, duties and responsibilities of the regulator, among others), and • financial autonomy (information on budgets including sources, financial autonomy to execute expenditure decisions, if the agency’s resources have been impounded by the chief executive). • The questionnaires were often applied in loco at the agencies, face-to-face. • Only four state regulatory agencies sent their answers by e-mail. • All of the questionnaires were applied at the same period of time • From April to June 2005.

  16. Examples: • Has the Governor ever interfered formally or informally in the agency’s policy making process? • Have the agency’s budget been impounded (contingenciados)by the executive in the last three years? • If “no,” a value of 1 was attributed to the agency. If “yes,” the agency received a zero. • Sensitivity analysis (de jure vs. de facto) to test the robustness of our results and also compare those results with similar studies from other countries.

  17. Indexes of Autonomy of Regulatory Agencies

  18. Indexes of Autonomy of Regulatory Agencies

  19. Descriptive Findings of the Survey • one-third of the directors did not complete their terms • most agencies complain about the impact that budget impoundments have on their financial autonomy • in 13 agencies, state governments have interfered in the agency’s decision-making process • 6 state agencies have no legal restrictions for appointments or dismissal of directors

  20. Agencies’ Autonomy: A tale of two states • AGERGS (Rio Grande do Sul): the governor, Olivio Dutra, interfered in the agency’s autonomy firing two directors. The Supreme Court safeguarded that autonomy. • ARSEP (Rio Grande do Norte): the newly elected governor, Wilma Maia, sacked two directors of ARSEP-RN, one of whom was the past governor’s brother who had been appointed in the last week of the administration of the defeated incumbent. The state assembly agreed to the changes and no contest ensued.

  21. Variables: • Dependent Variable • index of autonomy • Independent Variables • Governor’s durability in office (or Turnover) in three consecutive elections (1994, 1998, and 2002) • It varies from zero (when the same political group was the winner in all three consecutive electoral episodes) to 4 (when no one single political elite was able to win two elections). • Electoral Risk from elections polls in the 1998 and 2002 gubernatorial elections. • Coalition size. • This is the percent of seats held by the parties that gives political support to the governor’s administration within the State Assembly • GDP per capita (control)

  22. Governor’s Party Composition, Party Size, and Coalition Size Source: Superior Electoral Tribunal (TSE) website and State Assemblies

  23. Governor’s Party and Coalition Size

  24. Interaction-term (turnover and coalition size) • This interaction-term allows us to determine whether the effect of turnover on autonomy gets more or less restrictive as we move from states with lower to higher levels of legislative support for the governor. • If we find that the marginal effect of turnover gets stronger with bigger coalition sizes, then we can conclude that political elite turnover in power and size of the majority are complements. • If the marginal effect of turnover gets smaller or even becomes statistically equal to zero, then we can conclude that both of these dimensions are substitutes. • We predict that if an incumbent governor is backed by a majority in the state assembly but, at the same time, is electorally weak and is not expected to win the upcoming election, the governor and his majority are more likely to insulate the regulatory agency in anticipation of a new opposition governor.

  25. OLS Estimation of the Level of Regulatory Autonomy :

  26. Marginal Effect of Elite Turnover on Regulatory Autonomy

  27. Conclusions • The institutional design of new regulatory agencies was an endogenous choice of governors driven by: • electoral risk, • governor’s durability in power, and • the majority strength that gives support for the governor within the State Assembly.

  28. Conclusions: • The greater the government uncertainty (turnover and electoral risk) the higher the autonomy delegated to regulatory agencies • The size of the governor’s coalition in the state assembly was not statistically significant. • Governors are essentially concerned with the rivals for the gubernatorial position. • However, when we interacted the governors’ durability in office (turnover) with the size of the governor’s majority within the legislature we observe that turnover has a positive marginal effect on political autonomy when coalition size is over 60 percent of seats in the state legislature. • Because governors have great ability in building oversized majority coalitions, coalition strength influences the governor’s choice when he/she faces credible threats from rival elite groups.

  29. Next Steps: • Investigate the degree and determinants of agency autonomy in other institutional contexts in LA. • Investigate the impact of regulatory autonomy (or governance) on the economic performance. • Investigate the dynamic evolution of Brazilian regulators • To raise awareness for the effect of “regulatory risk” and “cost of capital” for infrastructure investment Regulatory Authorities in Latin America (1979-2002)