Case Study 3 Planning, Negotiation, & Implementation

JPART 2 5 :5 - 2 5

Transactional Authority and Bureaucratic Politics Daniel Carpenter,* George A. Krausef *Harvard University; University o f Pittsburgh

ABSTRACT

Bureaucratic politics research couched within the new institutionalism paradigm has largely focused on principal authority rooted in formal (institutional) mechanisms that are ulti­ mately both devised and chosen by politicians. A nascent literature has emerged over the past two decades whose underpinnings reflect increasing gravitation towards a transactional authority perspective, one that is compatible with behavioral theories of organizations. This transactional authority perspective departs from an exclusive reliance on formal mecha­ nisms insofar that agent compliance is motivated by either mutual or bilateral agreement for both the principal and the agent. This perspective is rooted in not only the agent's "sanc­ tioned acceptance" of the principal's authority but also the principal's "sanctioned accept­ ance" of the agent's legitimacy. We explore the logical implications of this transactional authority perspective for better understanding principal-agent relationships in the study of bureaucratic politics. We conclude by recommending that future research should redirect scholarly attention towards analyzing informal compliance and resistance mechanisms in bureaucratic politics, as well as offer a richer pluralist conception of bureaucratic governance in a democracy.

"........ authority nevertheless rests upon the acceptance or consent of individuals........... authority fails because individuals in sufficient numbers regard the burden involved in accepting necessary orders as changing the balance of advantage against their interest, and they withdraw or withhold the indispensable contributions.”

(Chester I. Barnard, 1938: 163-164)

‘Authority that is viewed as legitimate is not felt as coercion or manipulation, either by the man who exercises it or by the man who accepts it.”

(Herbert A. Simon, 1957: 106)

This essay is based on George A. Krause’s 2012 Herbert A. Simon Award Lecture entitled “Organizations, Transactional Authority, and the Study o f Bureaucratic Politics” to the Midwest Political Science Association. We thank Dan Berkowitz, Anthony Bertelli, David Lewis, Denise Rousseau, and the anonymous JPART referees for their extremely helpful comments that improved the caliber of ideas presented in this essay. Any shortcomings associated are solely the responsibility o f the authors. Address correspondence to the author at dcarpen ter@gov. harvard. edu.

doi: 10.10 9 3/jopa rt/m uu0 12 Advance Access publication June 20, 2014 © The Author 2014. Published by Oxford University Press on behalf of the Journal of Public Administration Research and Theory, Inc. All rights reserved. For permissions, please e-mail: [email protected].

6 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a rc h a n d T h e o ry

Authority is central to the study of how organizations function.1 2 Defining the nature of authority in organizations is therefore critical for properly understanding prin­ cipal-agent relationships. In the study of bureaucratic politics, both the role and distribution of authority is vital to determining policy outcomes. Research in this subfield primarily focuses on formal authority as the crucial mechanism for deter­ mining who controls policymaking. In studies of delegation, for instance, the princi­ pal uses their constitutionally vested authority by writing statutes to determine how much policymaking authority that they wish to delegate, and to whom (e.g., Epstein and O ’Halloran 1999; Huber and Shipan 2002). In studies of political control of the bureaucracy, formal authority provides political institutions the means to exercise their capacity to restrict, monitor, and sanction agency behavior (e.g., Carpenter 1996; McNollGast 1987, 1989; Moe 1989; Shipan 2004; Weingast and M oran 1983; Wood and Waterman 1994). Formal authority in bureaucratic politics defines the official limits or parameters that both shape and constrain the action of the principal and agent, respectively. The nature of authority in political-agency relations has broader normative implications for bureaucratic accountability in a representative democracy. As these parameters become “loosened,” greater weight is given to expert judgment vis-a-vis popular will (Krause 2013).

The dominant approach to understanding bureaucratic politics relies on the prin­ cipal unilaterally defining the terms of any contract with the agent, and thus ensur­ ing that an acceptable course of action is undertaken by the agent consistent with the principal’s objectives (i.e., principal authority).1 Principal authority therefore is comprised of legal provisions enumerated through constitutions, statutes, executive action, rules and procedures, and agency structure and design, but to name a few. These terms, which are widely viewed as being set by the principal, typically specify the formal obligations confronting both parties, as well as limits to each actor’s authority. In the realm of delegation, for example, the key implication resulting from a princi­ pal authority perspective is that a bureaucratic agent can make choices within a con­ strained set of menu options offered to them by the political principal(s). These menu options that determine the feasible agency discretion set may be either exogenously determined by the political principal (e.g., Bawn 1995; Epstein and O ’Halloran 1999; Huber and Shipan 2002), or endogenously set based on bureaucratic agents’ willing­ ness to invest in policy expertise (e.g., Callendar 2008; Gailmard and Patty 2013).3

Under principal authority, the principal effectively sets the rules of the game and the agent represents either a constraint on the principal’s course of action (i.e., the act and terms of delegation); or instead, the agent is heavily constrained in their course of

1 Organizations can be thought o f here as “teams that play the game,” and thus operate in a landscape in which, the “rules of the game” (i.e., institutions) are created, articulated, enforced, and altered (N orth 1990,4; see also Wallis and N orth 2012). 2 In the limiting, albeit impractical case of principal-fiat, the principal is guaranteed their optimal outcome since there are no transaction costs (i.e., neither the moral hazard nor adverse selection problems exist, and the principal experiences an absence of internal coordination problems). That is, bureaucratic compliance is perfectly attained. 3 Although theories of endogenous expertise provision provide a substantially richer characterization of bureaucratic politics than standard work emanating from the principal authority tradition, they remain rooted in principal authority since the menu of incentive options offered by the political principal represents the basis for cultivating expertise from bureaucratic agents.

Carpenter and Krause Transactional Authority and Bureaucratic Politics 7

action due to some combination of ex ante or ex post mechanisms (i.e., political con­ trol o f the bureaucracy). Although bureaucracies may need prodding with some rule- based combination of “carrots” (inducements) and “sticks” (punishments), the fact remains that political principals are treated as ultimately deciding the terms of their relationship with an agent based on an explicit contracts paradigm (Moe 1984). After all, it is the principal (one or a set of elected officials) that is ultimately responsible for the choice of governance structures (Moe 1989), both the content and application of administrative rules and procedures (McNollGast 1987, 1989), and general terms or conditions of the relationship, subject to constraints afforded by the agent (e.g., moral hazard), as well as those that they incur on their own (e.g., adverse selection). Put another way, the political principal exercises “constrained” power over the bureau­ cratic agent via a host of institutional mechanisms at their disposal (Moe 1984).4

In this essay, we advance a simple, yet powerful argument. We contend that the predominant conceptualization of authority in bureaucratic politics - grounded in principal authority—is both incomplete and inaccurate. It is incomplete not only because formal institutional mechanisms devised by principals are often insufficient to ensure bureaucratic compliance without “sanctioned acceptance” by bureaucratic agents (Simon 1957), but also since dynamic reputational incentives—and subse­ quent behavior—are part and parcel of bureaucratic politics (e.g., Carpenter 2001, 2010; Knott and Miller 2008; Krause and Corder 2007; Miller 1992, 2000). Principal authority also offers an inaccurate portrait of bureaucratic politics since it fails to fully appreciate the role that government agencies play in setting the terms of agree­ ment with political principals (e.g., Carpenter 2001; Waterman and Meier 1998). Given independent bases of both legitimacy and power in regulation, public agencies can and do shape the very statutes that give them power, sometimes by engaging in a form of lobbying of their own (Carpenter 2001), at other times by engaging in the very drafting of such legislation (Carpenter 2000, 2001, 2010; Foreman 1988).

Instead, our aim is to encourage future research to adopt a transactional author­ ity perspective to better understand bureaucratic politics within a principal-agent framework. This particular view of authority in organizations is hardly novel, and there is tangible movement towards this direction within an important, emerging body of scholarship in the study of bureaucratic politics noted throughout this essay.

4 In both an intellectually rich and provocative essay, Terry Moe (2005) characterizes existing paradigms used to explain delegation and political control o f agencies as representing a voluntary cooperative relationship between the principal and agent. However, Moe’s logic rests on agents (i.e., bureaucrats) having tenable outside options of departing from the relationship (leaving the agency) or never taking part of it (not entering the agency) that exhibit very high transaction costs for them to incur (Moe 2005, 220, note 29). Moreover, although political principals have to induce agent compliance, they solely determine the terms o f such arrangements based on their formal powers. Thus what may appear as mutually beneficial voluntary compliance by government agencies in accordance with Moe’s thesis, is effectively not. Rather, notwithstanding excessively costly “exit” or “defecting” options, agencies will use various means at their disposal to offset the force o f the formal powers unilaterally applied by political principals. As a result, the logic of the extant literature rooted in principal authority is not one premised on cooperation, voluntary compliance and mutual benefit as Moe (2005) asserts, but rather is tied to exercise o f formal authority by the principal(s), subject to the constraints that they face from the agent and third parties (e.g., interest groups). Later in the essay, we discuss how a transactional view of authority provides a distinct lens on cooperation and mutually beneficial agreements in relation to the standard explicit contracts paradigm that is much more commonplace in extant research on bureaucratic politics.

8 Journal o f P ub lic A d m in is tra tio n Research a n d T heory

Transactional authority is rooted in seminal treatises on organizations (e.g., Barnard 1938; March and Simon 1958; Perrow 1986; Selznick 1984; Simon 1957, 1997), and appears in numerous social science applications, ranging from relational contracts (e.g., Baker, Gibbons, and Murphya 2002) to self-enforcing contracts (e.g., Ostrom 1990; Tao and Zhu 2000) to unwritten agreements between employers and employees residing in firms (Rousseau 1995). In short, transactional authority rests on the prem­ ise of bargaining and mutual exchange that reflects a partnership—albeit sometimes a contested one—between principal and agent. “That is, the principal and agent share responsibility for setting the terms of their informal arrangements, and possibly even their formal ones in many circumstances.” Some of these arrangements may be con­ tractual in nature, whereas many others occur outside the purview of such explicit contracts. Transactional authority differs markedly from the canonical view of princi­ pal authority that treats political principals as ultimately being decisive in the course of action pursued by bureaucratic agents.5

U N D E R S T A N D IN G T H E R O L E O F A U T H O R IT Y IN O R G A N IZ A T IO N S

The nature of authority is foundational to the principal-agent relationship between politicians and bureaucracies. This requires advancing an appropriate definition of authority upon which to premise our discussion. A functional definition of author­ ity should be sufficiently general enough to encompass both formal and informal aspects of organizations. One definition that satisfies this dual requirement is Robert Presthus’s classic (1960) definition. Presthus notes that authority is the:

capacity to evoke compliance.............Authority seems more likely to be a contingent grant, received initially as part of a formal position but requiring nourishment from other kinds of legitimation as well. (Presthus 1960, 86, 88)

Two notable features of Presthus’ definition of authority in organizations are that (a) compliance is evoked and (b) authority is conditional by its very nature. Presthus’s definition suggests that authority in organizations is derived from both the principal and the agent, where each mutually defines the terms of the relationship. This is what we call transactional authority. Transactional authority is, in some sense, a form of relational authority, one whose terms are defined by both the principal and agent through the exercise of both formal and informal mechanisms, and often shaped by third parties or external audiences.

Consistent with Presthus’s (1960) definition, Herbert Simon (1957, 1997, chap. 7) views administrative authority as requiring public agencies to respect the role of polit­ ical principals, separate from their formal powers. For bureaucratic agents to possess and maintain legitimacy in the judgment of political principals, they must possess suf­ ficient expertise so that they inspire respect and confidence from them. This is achieved by politicians by being able to accurately gauge what they do know from what they

5 Obviously, in a multiple principals setting found in common agency problems, the principals may share formal authority (e.g., see Dixit, Grossman, and Helpman 1997). The key point is that it is the principal(s), and not the agent, that ultimately determines the formal terms o f their relationship.

Carpenter and Krause Transactional Authority and Bureaucratic Politics 9

do not. The ability of political principals to handle those items that they have skill on, while entrusting the judgments of bureaucratic agents for those aspects which they do not, is essential for cultivating the exercise of legitimate authority. In doing so, both politicians and agencies jointly exercise authority—some aspects operate in different spheres (separate powers for principal and agent), whereas others do not (shared authority). Because a good deal of legitimate authority rests on things that the principal cannot directly control without the agent’s active cooperation, transactional authority in bureaucratic politics is much more in line with how authority is actu­ ally exercised in organizations. Although formal powers can be effectively applied to bureaucratic agencies, our cautionary argument is instead that restricting one’s under­ standing of authority to such powers held by politicians misses the vivid realities, as well as patterned subtleties, surrounding politician-agency relationships.

The mutual bargaining and exchange that is part and parcel of transactional authority is compatible with the concept of “sanctioned acceptance” (Simon 1957, 1997). According to Herbert Simon, sanctioned acceptance rests on four pillars: expertise, formal position, rapport between principals (supervisors) and agents (sub­ ordinates), and a generalized deference to authority rooted in socialization and iden­ tity. Each pillar of legitimate authority, save formal position, is determined outside the principal’s formal powers specified in explicit contracts. Informal rules, profes­ sional norms, organizational identities, and the like can provide the basis for legitimiz­ ing authority. For those pillars determined beyond the purview of explicit contracts, “sanctioned acceptance” within organizations implies that both employees (agent) and employers (principal) are “contract makers” (Rousseau 1995, chap. 3). More pre­ cisely, “Contracts are not an exercise in manipulation or distortion of reality. Rather, they are attempts at the creation of mutuality—where an exchange occurs that both parties desire and value. Mutuality means that each party benefits, obtains some capacity to predict what the other will do, and is enabled to improve his or her ability to yield desired results.” (Rousseau 1995, 86). Under the US Constitution, administra­ tive authority comprises both a political principal enumerated with specified formal powers that must be accepted by bureaucratic agents and the latter provides a con­ stitutional link between the polity and governmental action (e.g., Bertelli and Lynn 2006; Caldwell 1988; Rohr 1986). That is, transactional authority implies a coopera­ tive hierarchical relationship reflecting mutual agreement, albeit at times the nature of the politician-agent relationship is contested with each party winning some con­ flicts while losing others. Political control and bureaucratic autonomy therefore can be nested under a transactional authority framework.

T ra n s a c tio n a l A u th o r ity v e rs u s P rin c ip a l A u th o r ity in B u re a u c ra tic P o litic s

A blunt, yet key characteristic distinguishing transactional authority from principal authority is that the former is rooted in reciprocity (e.g., Krause 1999), whereas the latter reflects unilateral control by the principal(s). Under principal authority, the principal chooses the best incentive or oversight mechanisms to further their aims, conditional on the agent’s best response. In theories of delegation, for instance, politi­ cians determine how much authority to allocate to an agency, based on the degree of

10 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a rc h a n d T h e o ry

principal-agent policy congruence and the relative information advantage enjoyed by the agency (e.g., Bawn 1995; Bendor and Meirowitz 2004; Epstein and O’Halloran 1999; Gailmard 2009). In political control theories, electoral institutions seek to devise an efficient set o f formal tools to limit bureaucratic shirking, whether they are mani­ fested ex ante through formal rules and procedures (McNollGast 1987, 1989), proce­ dures, and institutional structures (Lewis 2003; Moe 1989; Wood and Bohte 2004), or ex post via constitutional means such as appointment mechanisms (Lewis 2008; Wood and Waterman 1994), budgetary resources (Banks and Weingast 1992; Ting 2001), legislative oversight (Shipan 2004; Weingast and M oran 1983). Under transactional authority, both the principal and agent jointly shape the terms of whatever author­ ity is to be delegated by the principal to the agent (e.g., Whittington and Carpenter 2003; Krause 2003; Wilson 1989, 251). Similarly, political control under transactional authority recognizes the potency of bureaucratic action in either neutralizing or off­ setting the principal’s use of formal powers to direct agent behavior (e.g., Carpenter 2001, 2010; Huber 2007; Krause 1999; Moe 2009; Rourke 1984). In theoretical terms, transactional authority presumes that because bargaining and exchange is not solely determined by the principal’s constrained choice to maximize its utility. Both the prin­ cipal and agent share in setting the terms of their relationship, in part because they are both attempting to solve a complex problem. This complexity arises from the durabil­ ity of their relationship under repeated play, and also mutual existence of both formal and informal agreements.

Critical recent theoretical advances emanating from a principal authority frame­ work have been quite cognizant regarding the means by which bureaucratic agen­ cies can effectively mitigate the exercise of formal powers by political principals. Lor instance, although principals often possess formal structural powers that their agents do not enjoy, in equilibrium such principal powers must be exercised in a manner that facilitates joint cooperation in a “partnership” (e.g., Gailmard 2002; Gailmard and Patty 2007, 2013; Miller 2005). This partnership signifies the principal and agents’ willingness to agree to cooperate in order to further their respective interests, whether it is manifested by mutual or shared interests (e.g., Carpenter 2001, 18, 367; Waterman and Meier 1998), or as a solution to conflicting interests that requires both parties to have a voice in stating the terms o f agreement that is amenable to both parties (e.g., Brehm and Gates 2011; Cyert and March 1992; Miller 1992). Although this new wave of delegation scholarship has provided a more flexible account of principal author­ ity that accounts for partnership and cooperation, much of this work remains firmly rooted in principal authority. Because the principal ultimately defines the (contrac­ tual) terms of their relationship with the agent, these sophisticated incentive compat­ ibility mechanisms remain under the rubric of principal authority.

Transactional authority involves dynamically evolving relationships and repeated interactions among actors through time (Padgett and Ansell 1993; Padgett and Powell 2012). By contrast, principal authority is usually confined to static equilibrium concepts based on the principal controlling formal mechanisms for compliance (e.g., agency design, rules and procedures).6 Because government agencies are less susceptible to

6 See Callander (2008) for an im portant exception regarding how the dynamics of policy complexity endogenously affects legislative-agency relations.

Carpenter and Krause Transactional Authority and Bureaucratic Politics 11

personnel turnover than electoral institutions, they experience greater institutional continuity and more solidified bases of external (clientele) support from professional networks (e.g., Carpenter 2001, 2010; Rourke 1984; Wilson 1989). Government agen­ cies can thus “outlive” the politicians that seek to control and direct their behavior. Institutional rules and structures designed to constrain the bureaucracy therefore often become frayed with the passage of time. Because the nature of principal-agent relations can significantly vary through time, bureaucratic drift can enable govern­ ment agencies to increasingly exploit their information advantage through time by “defecting” from politicians’ preferred course of action (e.g., Horn and Shepsle 1989). The passage of time also favors government agencies in terms of pursuing their policy interests and activities consistent with professional norms and expertise. Government agencies routinely manifest such professional norms and expertise via a shared organi­ zational identity that reflects a team production process (Akerlof and Kranton 2010, 42-3; Barnard 1938; Selznick 1984). Organizational identity is formed through a combination of professional expertise networks, selective recruitment, and civil ser­ vice protections that reinforce shared administrative and policy goals that comprise an agency’s core mission (e.g., Carpenter 2001, 2010; Kaufman 1960; Mosher 1982; Wilson 1989). Government agencies possessing greater stability are more apt to make better long-run policy judgments since the future reputation costs that they incur for poor performance realized at a much later date will be higher than compared to less stable institutions (Krause and Corder 2007). Resting authority in the hands of government agencies can therefore offer a structural solution to the inherent time- inconsistency problems plaguing myopic politicians bound by the electoral pressures arising from a volatile electorate (Falaschetti and Miller 2001; K nott and Miller 2008; Miller 2000). Additionally, agency authority can provide a higher caliber of govern­ ance through greater information elicitation opportunities by allowing public agencies to enjoy considerable discretion (Gailmard and Patty 2013). The existing literature from both public administration and political science traditions compellingly eluci­ date the mechanisms that can result in public agencies playing a vital, independent role in determining the nature by which they administer public policies.

T ra n s a c tio n a l A u th o r ity : E m p iric a l Im p lic a tio n s f o r t h e S tu d y o f B u re a u c ra tic P o litic s

The empirical implications derived from a transactional authority perspective are best summarized by Herbert A. Simon’s view of compliance within organizational settings:

For the organization to work well, it is not enough for employees to accept commands literally. In fact, obeying operating rules is literally one of the favorite methods of work slowdown during labor-management disputes, as visitors to airports when controllers are unhappy can attest. What is required is that employees take initiative and apply all their skill and knowledge to advance the achievement of the organization’s objectives. (Simon 1995,281).

In the realm of bureaucratic politics, it is a commonly understood yet underappreci­ ated fact that bureaucrats possess considerable leeway that is distinct from authority

12 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a r c h a n d T h e o ry

delegated to them by political principals (e.g., Carpenter 2001; Krause 1999; Rourke 1984; Waterman and Meier 1998; Wilson 1989). Even if a political principal employs a formal mechanism at their disposal to control bureaucratic behavior, this can be offset by agency action to which courts and other actors will defer. For example, the Department of Justice’s Antitrust Division increases enforcement output when their funding is lower than they deem optimal, while engaging in “status-quo preserving” enforcement levels when their funding is higher than they deem optimal (MacMillan 2012). Bureaucratic autonomy can be used to harness public authority for purposes of pursuing narrow interests to the detriment of social welfare (Moe 1990, 2009), or instead to pursue broader interests for the betterment of society (Carpenter 2000, 2001).7 Next, we consider two particular implications of transactional authority for the study o f bureaucratic politics—both explicit (i.e., formal) and implicit (i.e., informal) contracts require “sanctioned acceptance” by bureaucratic agents, and that dynamic reputations matter for both political principals and bureaucratic agents.

B o th E x p lic it a n d Im p lic it C o n tra c ts R e q u ire " S a n c tio n e d A c c e p ta n c e " b y A g e n ts

Contracts are routinely incomplete since every contingency or possible course of action cannot be codified. The canonical principal-agent framework relying on prin­ cipal authority posits that this actor utilizes tools at their disposal for purposes of making policy choices and designing incentive systems based on their objectives, subject to constraints imposed on by the agent’s information advantage (Moe 1984). Principal authority views the political principal as a strategic social planner that can set statutory specificity, alter budgets, politicize appointments, and the like to deter­ mine policy outcomes in a constrained, albeit mechanistic fashion.8 In reality, con­ siderable slippage exists between contractual mechanisms and administrative reality. Implicit incentives offered to the bureaucratic agent at the behest of the political prin­ cipal cannot automatically solve the problem of incomplete contracts (Miller 1992). On a broader scale beyond the study of bureaucratic politics, the use of (impersonal) rules by governments are only effective when both powerful government and nongov­ ernment policy actors jointly wish to solve coordination dilemmas (Wallis and North 2012). Conversely, government coercion via the enforcement of rules are not seen credible by relevant policy actors (Wallis and N orth 2012).

A major advantage of analyzing incomplete contracts using a transactional authority lens is that political institutions and government agencies possess differ­ ent sources of external support (Carpenter 2001, 2004, 2010; Moe 1990, 234; Rourke 1984). For example, Gregory Huber (2007) shows that the basis for “strategic neutral­ ity” rests on a division of specialization with politician and interest groups loosely determining the overarching policy landscape at the national level, whereas bureau­ cracies employ both routines and standard operation procedures to obtain policy

7 In some instances, bureaucratic delay can also serve as an effective means for public agencies to avoid compliance to democratic preferences (e.g., Carpenter 2010; Krause and Dupay 2009). 8 Some analytical economic models of industrial organization depart from principal authority by entrusting authority with a social planner who subsequently determines whether to delegate to a politician or a bureaucrat (e.g., Alesina and Tabellini 2007; Dewatripont, Jewitt, and Tirole 1999a, 1999b).

C a rp e n te r a nd Krause Transactional Authority and Bureaucratic Politics 13

control when implementing these policies at the subnational level. Amy Zegart (1999) demonstrates that bureaucratic politics underlying the inferior structural design of national foreign policy agencies immediately after World War II reflected both inter­ nal agency and cross-agency jurisdictional tu rf battles, coupled with myopic electoral concerns of legislators. These illustrations highlight the independent, and often con­ flicting, external sources of support garnered respectively by political principals and bureaucratic agents.

For implicit incentives to be effective in solving the incomplete contracting prob­ lem, “sanctioned acceptance” must be mutually agreed upon both parties. This may take the form of self-enforcing contracts to address common pool resource problems encountered with fisheries (Ostrom 1990) and local watershed partnerships (Scholz and Wang 2006). Alternatively, this type of relationship can take the form of rela­ tional contracts to solve coordination problems in policy areas as diverse as highway procurement by state governments (Gil and Marion 2013) and township and village enterprises relationship to Chinese state-owned enterprises (Tao and Zhu 2000). Put simply, the transactional authority perspective suggests that both principals and agents share a say in the design and implementation of formal and informal contracts—irre­ spective of whether task responsibility is shared or resides with only a single actor. In practice, incomplete contracts are can be most often characterized as a cooperative hierarchical relationship between political principal and bureaucratic agent. Hence, agent compliance arises for reasons that go beyond the purview of formal contracts whose terms are unilaterally defined by the principal. That is, incomplete contracts necessitate a systemic brand of legitimacy that transcends formal mechanisms at the principal’s disposal (Presthus 1960; Simon 1957).

One means of attaining sanctioned acceptance in the analysis of bureau­ cratic politics is the notion of organizational socialization and shared identities. For instance, empirical evidence drawn from the Federal Reserve’s Federal Open M arket Committee’s voting behavior reveals that the inculcation of strong profes­ sional norms within public bureaucracies can result in “internal” principals, such as agency heads or commission chairs, exerting greater influence over agent behavior than compared to “external” principals such as presidents (Krause 1994). Moreover, it is centrifugal forces from professional networks, and not centripetal forces from political principals, that most often result in administrative innovation. For exam­ ple, Steven J. Balia’s (2001) study of administrative reform finds that state insurance commissioners’ belonging to a professional association, National Association of Insurance Commissioners, are much more inclined to adopt the Health Maintenance Organization Model Act supported by this professional association compared to nonmembers. This desire to conform to professional norms is consistent with survey evidence from analyzing a large sample of US organizations showing that govern­ ment agencies are much more inclined to follow professional standards of conduct relative to both private and nonprofit organizations (Frumkin and Galaskiewicz 2004). Conformity to professional norms arising from socialization and shared iden­ tities is not only entirely consistent with legitimate authority as defined by Presthus (1960) and Simon (1957, 1997), but also contributes to the stability of structural arrangements (Meyer and Rowan 1977) that are often ascribed to principal author­ ity (Lewis 2003; Moe 1989; Wood and Bohte 2004).

14 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a rc h a n d T h e o ry

Sanctioned acceptance by both principals and agents is also rooted in a form of trust that is beyond the purview of an explicit contracts framework.9 Michael F. Altfeld and Gary J. Miller (1984) persuasively demonstrate that trust between the principal and agent is critical to the provision of policy expertise. Specifically, trust is crucial in ensuring that bureaucratic agents willingly choose to comply with politicians’ policy objectives (e.g., Brehm and Gates 1997, 2011; Miller 1992; Miller and Whitford 2002). Moreover, mutual trust between politicians and bureaucrats is central to ensuring that their policymaking oligopoly remains unfet­ tered from external influences (Goodin 1982). In developmental settings, a lack of trust between politicians and administrators can be critical for obtaining effective bureaucratic governance. For instance, a study by Dag Ingvar Jacobsen (1999) finds that a lack of trust among politicians and administrators in Tanzania reveals how a strategic withholding of information by bureaucrats yields greater transac­ tion costs associated with governance. Trust is therefore compatible with a trans­ actional authority perspective since sanctioned acceptance rests on the condition that coordination dilemmas are jointly solved by both politicians and bureaucrats in order to obtain a stable equilibrium agreement regarding the allocation of poli­ cymaking authority.10

B o th P rin c ip a l a n d A g e n t R e p u ta tio n s M a t t e r D y n a m ic a lly T h ro u g h T im e

Under principal authority, it is presumed that principals choose formal mechanisms which subsequently solve their agency problem once and for all under a particular set of theoretical conditions. In reality, bureaucratic politics reflects repeated interactions among politicians and agency personnel. Hence, norms of reciprocity and coopera­ tion are not fully appreciated even though they represent a natural consequence of repeated games (Axelrod 1984).

9 To be sure, potent formal mechanisms can be used to ensure bureaucratic agent trust, such as judicial review, transparency requirements, legislative oversight, and executive centralization through Office of Information and Regulatory Affairs, but to name a few. The focus here is on informal mechanisms since these focus on mutual trust between the principal and agent that are fundamental to the exercise o f transactional authority. 10 Recent advances in delegation models premised on principal authority maintain that equilibrium policymaking authority is determined by agent choices, subject to the menu of options provided by principals. Recent analytical models seeking to understand the endogenous development o f bureaucratic expertise persuasively demonstrate the critical role that bureaucratic actors possess even in the presence o f formal mechanisms. Sean Gailmard and John Patty (2013, chap. 2) make the appealing argument that while both bureaucrats and politicians have a shared incentive for augmenting bureaucratic expertise, bureaucrats choose only to invest in expertise when they obtain commensurate increases in discretionary authority. Steven Callander’s (2008) dynamic model of bureaucratic expertise reveals that the extent to which policymaking is complex (or lacks what he terms “invertibility”) can enhance agency policymaking powers to act in their own interests, at the expense o f political principals, contrary to the Ally Principle (see also, Bertelli and Feldmann [2007] for a similar perspective emanating from the power of third parties [e.g., interest groups] benefiting public agencies). Although rooted in principal authority given the principal’s control over the menu options that the agent has to choose from, the endogenous nature o f this new generation o f delegation models constitutes a much needed innovation that moves in the direction o f transactional authority since bureaucratic agencies are capable o f acting strategically by altering their provision o f expertise in response to a principal’s objectives.

Carpenter and Krause Transactional Authority and Bureaucratic Politics 15

Transactional authority is fully compatible with the fact that political-agency relations necessarily entail repeated interactions since it requires mutual bargaining and exchange on the part of both political institutions and government agencies.

In applied dynamic economic theory, principal-agency problems are often con­ ceived as dynamic control problems via the mechanism of implicit incentives that occur outside the bounds of an explicit contractual framework (e.g., Alesina and Tabellini 2007; Dewatripont, Jewitt, and Tirole 1999a, 1999b; Gibbons and Murphy 1992; Holmstrom 1999). Implicit incentives are used to appeal to an agent’s intrin­ sic motivations (e.g., long-term compensation via career advancement, professional esteem by peers within one’s own organizational field, a trusted broker of policy expertise or specialization) and hence, directly shape their reputations both within the agency and also to external audiences. Implicit incentives are especially powerful in public agencies since explicit contracts limit the amount and nature of economic rents that bureaucracies can accrue vis-a-vis private firms (Dewatripont, Jewitt, and Tirole 1999a, 183; Dixit 2002, 704). In a world where incomplete contracts are the reality of bureaucratic politics, effective use of implicit incentives to facilitate coop­ erative principal-agent relationships whereby both the principal and agent obtain benefits. Political principals benefit from not only greater agent compliance, but also reduce uncertainty surrounding an agent’s actions through establishment of a durable bureaucratic reputation (Carpenter and Krause 2012).11 Similarly, bureaucratic agents obtain benefits by augmenting support for their “brand” (the skills that they pos­ sess and how they use them) both within the agency, and also to external audiences (Carpenter and Krause 2013). Therefore, the linkage between implicit incentives and durable bureaucratic reputations is a critical aspect of transactional authority since both principal and agent jointly determine the nature of these implicit incentives so that both parties obtain benefits.

These implicit incentives confronting agents are often motivated not only by their professional orientation, but also by their organizational position within a bureaucratic agency. In the former case, Christopher Adolph’s (2012) illuminating of cross-national study of central bankers reveals that bureaucratic policymakers are “socialized” by their career choices in terms of both professional and sectoral career paths (e.g., private sector firms, academia, or government service). In turn, central bankers’ monetary policymaking decisions can be understood as a means to cultivate durable reputations from their respective peer reference group that will serve their own interests after they have completed their appointed service. Adolph shows that the manner in which central bankers are chosen by elected officials reflects the former’s intrinsic motivations as transient policymakers seeking to make a positive impression with their respective occupational fields for purposes of career advancement and pres­ tige after they depart the agency.

Similarly, the selection of agency personnel to serve in particular positions within bureaucratic organizations may be done with long-term reputational incentives in mind. Joel Aberbach and Bert A. Rockman’s (2000, 72-4) compelling study of US

li For instance, the proper design of implicit incentives by the principal and agent can limit problems associated with pooling equilibria in which the principal cannot effectively discriminate among agents for various tasks.

16 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a rc h a n d T h e o r y

federal executives reveals that career executives (civil servants) are part of a guild sys­ tem that possess strong professional norms since they tend to stay and advance within a given agency, whereas political executives (appointees) are part of an entrepreneurial system that reflects weaker professional norms arising from greater fluidity across public agencies. David E. Lewis (2008) convincingly argues that patronage agency appointees will be more closely motivated out of loyalty to the appointing president or party than to either the policy area or agency mission that reflects their substantive task responsibilities. That is, the method of agent selection, the policy expertise, and organizational field are each critical in determining the structure and effectiveness of implicit incentives in bureaucratic politics.

Evaluating the performance of bureaucratic agencies is often made quite difficult since politicians actually know little about the actual work required of bureaucrats to perform policy and administrative tasks (Kaufman 1960; Wilson 1989). Objective measures of agency performance reflecting the output of processes are thus generally neither known nor understood by political principals. For instance, US Presidents have sought to better understand the processes yielding agency outputs through evalu­ ative performance instruments such as the National Performance Review advocated during the Clinton administration and the Program Assessment Rating Tool (PART) subsequently introduced by the George W. Bush administration. The aim of this per­ formance management revolution in public administration was simple—the intention was for presidents to better understand the task process undertaken by bureaucratic agents by understanding their subjective motivations and assessments of the latter’s own responsibilities (Moynihan 2013).12 Yet, meaningful interpretation of such sub­ jective agent performance evaluations is largely conditioned by the dynamic reputa­ tions of both the political principal and bureaucratic agent.

In theoretical terms, acute difficulties arise for evaluating agent performance when policy outcomes cannot be easily identified, or may take many years to obtain an accurate objective sense of their policy impacts. When the administered policy is not observable at present since it transcends beyond the fiscal year in question (Krause and Corder 2007), or when durable reputations for performance and accountability are amassed through time (Carpenter 2001, 2004, 2010), subjective evaluations of agent performance require mutual bargaining and exchange for they to offer produc­ tive information. Recent microeconomic theory research on principal-agent relations has not only shown the necessity of reciprocity between the principal and agent in the presence o f subjective agent performance assessments, but its consequences for empowering agents. Specifically, conflict creation by the agent in response to negative performance evaluations can be welfare enhancing if it reduces the principal’s incen­ tive to falsely lower its appraisal of the agent’s performance (Sebald and Walzl 2014). That is, a better evaluation scheme that satisfies the mutual needs of the principal and agent will result in greater bureaucratic effort since agent’s perception of the principal

12 A transactional authority perspective is especially relevant given the broad and diverse empirical literature in public administration that focuses on subjective assessments o f bureaucracies across a wide range o f agent- based phenomena such as discretion (Bertelli 2012) to performance management (Moynihan 2013; Lavertu, Lewis, and Moynihan 2013) to the intrinsic motivation consistent with an agency’s core mission (Wright 2007; Wright and Pandey 2008) to how best structure the organizational environment of government agencies to empower bureaucratic personnel (Moynihan and Pandey 2007).

Carpenter and Krause Transactional Authority and Bureaucratic Politics 17

will be more favorable under an evaluative scheme that is acceptable to the agent (La Cour Sonne and Sebald 2012, see also Prendergast 1993).

One such empirical illustration from public adm inistration that highlights this principal-agent reciprocity logic involves the subjective evaluation o f research and development (R&D) programs administered by US federal government agencies. These R&D programs are characterized by lower bureaucratic effort in complet­ ing PART evaluations (Lavertu, Lewis, and Moynihan 2013), coupled with higher PART scores (Gallo and Lewis 2012). In turn, bureaucratic agencies, as well as their clientele groups, can effectively place pressure on Office of M anagement and Budget evaluative decisions made on behalf o f presidents that they do not like (Gilmour 2006). This “working the r e f' hypothesis duly noted by Moynihan (2013) is entirely consistent with the benefits conferred to both agents and principals when the former creates conflict while operating under a subjective performance evaluation scheme. Moreover, public agencies administering these R&D programs possess tangible influence over their principal (OMB) in terms of reshaping those who evaluated these subjective performance results (M oynihan 2013, 507), and also altering the evaluative criteria of these government programs in their favor (Frederickson and Frederickson 2006).

In closing, taking seriously the reputations of both political institutions and gov­ ernment agencies has several implications for understanding how the distribution of authority between the principal and agent affects the nature of their relationship. Under principal authority, the principal-agent problem can be viewed as a one-sided political principal’s problem where only the bureaucratic agent’s reputation for compli­ ance matters. This is because the principal’s problem is defined as a “control problem.” Specifically, political principals often rely on formal mechanisms to elicit compliance in order to mitigate adverse selection by selecting the “correct” agents, and limit moral hazard via contracts and informal incentives designed to reduce agent shirking. Under principal authority, compliance is determined by a bureaucratic agent’s reputation for how they utilize their policy or administrative expertise.

The principal-agent problem viewed within a transactional authority lens is a two-sided principal-agent reputational problem. In the canonical case of the tradeoff between coalitional drift and bureaucratic drift (Horn and Shepsle 1989), for example, this means that not only does the bureaucratic agency’s reputation for drift matters in the principal’s decision calculus as presumed under principal authority, but rather the politician’s reputation regarding coalitional drift will also affect the bureaucracy’s decision calculus as they mutually bargain and exchange to obtain time-consistent policies. Sean Gailmard and John W. Patty’s (2012, chap. 8) historical case study of the early development of the Securities and Exchange Commission during the 1930s and 1940s is broadly consistent with this perspective. Specifically, the authors persua­ sively show that the Securities and Exchange Commission (SEC)’s ample reputation for policy capacity enabled it to serve the role as mediator between political principals and interest groups. The SEC was afforded with both considerable autonomy and dis­ cretion during the agency’s early years that reflects a mutual choice by both Congress and the agency. That is, the credible commitment problem is determined jointly by a bureaucratic agent’s reputation for policy competence, as well as the political princi­ pal’s moral hazard (K nott and Miller 2008; Miller 2000, 2005).

18 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a rc h a n d T h e o r y

MOVING FORWARD: HOW TRANSACTIONAL AUTHORITY CAN INFORM THE STUDY OF BUREAUCRATIC POLITICS

In the conduct of public administration, even when political control over the bureau­ cracy is seemingly the tightest, considerable slippage remains can remain between the principal’s goals and agent’s actions. Some of the best examples of this tendency come from authoritarian political systems. For instance, in the Soviet bureaucracy where formal administrative authority was highly centralized, economic historian Paul Gregory (1990, 6) notes that “The majority of Soviet bureaucrats are not held respon­ sible for final results. They occupy largely “functional” positions................Although they establish the rules, norms, and directives under which industrial ministers and enterprises operate, they are not (and often cannot) be held accountable for the effects of their actions on production outcomes.” Similarly, Wei Li and Dennis Tao Yang (2005) find that the Chinese central authority’s “Great Leap Forward” policy program during the 1950s and 1960s was beset with the same type of problems. Specifically, Li and Yang (2005) show that strong formal authority, via rigid rules exercised by the Chinese central government, resulted in both a substantial misallocation o f resources and excessive procurement by the bureaucracy as they sought to implement govern­ ment policies that would move China from an agrarian to an industrialized society. These pair o f illustrations underscores the lack of bureaucratic compliance that results from a highly restrictive form of principal authority. This should hardly be surprising given that explicit contracts are incomplete by nature, and hence, produces the type of pathologies associated with coercive controls over the bureaucracy (Gormley 1989). Namely, effective bureaucratic compliance requires two-way reciprocity between principal and agent that requires that both parties engage in mutual bargaining and exchange via the agent viewing the principal’s exercise of authority as being legitimate, while also allowing sufficient flexibility for evolving principal-agent relationships that shift through time.

This essay maintains that the most promising path to future scholarly develop­ ment in the field of bureaucratic politics is anchored to a transactional view o f author­ ity. At its core, transactional authority presumes that principal-agent relations reflect a power sharing arrangement whereby both actors either implicitly or explicitly deter­ mine those tasks and responsibilities to be shared between politicians and bureaucrats from those which are the sole purview of either actor. The basis for this distinction is obvious. Under principal authority, power is extrinsically shared at the principal’s dis­ cretion. That is, whoever holds authority (principal) both designs and controls select­ ing from a menu of constrained options. In doing so, politicians can thus employ the appropriate (efficient) incentive compatibility system of their choice to elicit compli­ ance. Authority in organizations is considerably more complex than what is posited by canonical principal-agent models that rest solely on formal mechanisms under the principal’s exclusive control.

Under transactional authority, however, authority is intrinsically shared among the principal(s) and agent. This means that even if the principal employs a formal mechanism at their disposal to control bureaucratic behavior, this can be offset by agency action. A theory motivated by transactional authority “first principles” does not deny the role of explicit contracts in understanding agency problems; it only insists

Carpenter and Krause Transactional Authority and Bureaucratic Politics 19

that explicit contracts comprise but one aspect of this relationship. The net effect of implicit contracts, agent powers, and the like is to undermine the effective practice of formal principal authority exercised under explicit contracts. Indeed, evaluations of the efficacy o f formal principal authority will be biased upward when mutual bargain­ ing and exchange, dynamically evolving relationships, and “sanctioned acceptance” by agents are omitted from the story. A transactional authority perspective accounts for this fact by allowing for the exercise of a principal’s powers alongside those held by the agent. Bureaucratic compliance is not merely a function of the principal’s imper­ fect choices, but instead represents the principal and agent’s shared responsibility for setting the terms of both their formal and informal arrangements. This perspective is consistent with social psychological models of contracts that view contracts as a flexible exchange agreement between the supervisor and subordinate comprised of a legal-formal component that constitutes the explicit contract, plus an informal- implicit component that rests upon oral communications and implied commitments embedded within the organizational environment (Rousseau 1995, 2).

The foundations of transactional authority in bureaucratic politics are firmly rooted in the US Constitution, albeit in a flexible manner. Specifically, the US admin­ istrative state is firmly anchored to both the Constitution and the Bill of Rights given its central role in matters of governance in a democracy (Moe and Gilmour 1995, 135; Newbold 2010, 545). Such transactional authority is entirely consistent with both Hamiltonian and Madisonian conceptions of the administrative state. From a Hamiltonian tradition, the notion of administrative responsibility discussed in Federalist 70 and 72 reflects public administrators’ accountability to elected officials, the polity, and fellow public administrators (Caldwell 1988, 95-6). Public administra­ tors’ mutual responsibilities to multiple audiences require that they engage in consti­ tutional subordination as a means of balancing the interests of a myriad of policy stakeholders (Rohr 1986). From a Madisonian perspective, public bureaucracies exercise socially just and legitimate actions within the fabric o f the American con­ stitution (Bertelli and Lynn 2006, 3). Put another way, managerial responsibility in a Madisonian framework requires accountability not to political principals alone, but ultimately to the Constitution itself.

Future research motivated by transactional authority is capable of producing novel insights into the role of informal mechanisms (i.e., implicit contracts and alter­ native incentives) in principal-agent relations, since little is relatively known about them relative to formal mechanisms such as budgets, appointments, rules and proce­ dures, and agency design (i.e., explicit contracts). This requires scholars to transition from a neoclassical theory of the firm to a behavioral theory of the firm (or even an evolutionary theory of the firm; see Padgett and Powell 2012) to acquire explana­ tory leverage into informal mechanisms that arise beyond the scope of formal powers contained in explicit contracts. Quite possibly, theories that hold the most long-term promise are ones that embed informal mechanisms within the “loose constraints” posed by formal mechanisms. Theories that emphasize networks and identity forma­ tion (Padgett and Powell 2012) come under the rubric of a transactional authority framework. In turn, unified theories of this sort can provide considerable purchase in better understanding how informal mechanisms affect administrative and policy outcomes within the parameters defined by explicit contracts.

20 J o u r n a l o f P u b lic A d m in is t r a t io n R e s e a r c h a n d T h e o ry

In closing, we seek to make two specific prescriptions for future research applied to the study of bureaucratic politics. First and foremost, research on bureaucratic politics should expand its current foci beyond constitutional and institutional theories by extending its reach into the interdisciplinary study of organizational theory, includ­ ing but not limited to contributions from sociology and psychology. The dominant approach centered on principal authority creates a “top-dow n” bias that necessarily renders power with political principals (K nott and Miller 2008; Waterman and Meier 1998). This canonical view of principal-agent relationships is incompatible with recent developments in organizational economics over the past decade or so that draw heavily upon both ideas and concepts developed in organizational sociology, social psychology, and decision sciences (e.g., Akerlof and K ranton 2010; Baker, Gibbons, and Murphya 2002). Put simply, organizations are central to how we understand pub­ lic bureaucracies in a democratic system. Second and relatedly, bureaucratic politics scholarship should be more firmly rooted in pluralist conceptions of representative democracy than has typically been portrayed in the extant literature. Seminal trea­ tises on pluralist democracy in the United States view the bureaucracy as representing a vital aspect of the American political system (Heclo 1978; Schattschneider 1960; Truman 1951). Transactional authority is entirely consistent with administrative gov­ ernance in a pluralist democracy such as the United States (Dimock and Dimock 1953, chap. 8; Gaus 1931; chap. 8; Long 1952). Although the study of bureaucratic politics has produced an impressive collective body of social scientific knowledge, our understanding of public bureaucracy’s role in a representative democracy will most fruitfully proceed when insights from both organizational and institutional theories are integrated into a unified framework of analysis.

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