The Dynamics of Principals and Agents : Institutional Persistence and Change in U.S. Financial Regulation, 1934-2003

This paper seeks to advance our understanding of the politics of delegation. Principal-Agent theory identifies four major reasons for delegating regulatory authority. I first examine the implications for two "quasi-parameters" of P-A relationships: the level of agent discretion and the ease or political-economic cost of reversing the grant of authority. I then introduce a dynamic element to understand endogenous changes in the quasi-parameters as well as exogenously triggered changes in the terms of delegation, including at the extreme the re-appropriation of authority by the principal. This modification of P-A can explain both the increasing stability of such institutional arrangements over time and their sometimes sudden change. It thus addresses prominent criticisms of rationalist models of institutions while retaining the core assumptions of P-A theory. The primary empirical analysis of these dynamics focuses on the history of corporate financial reporting regulation in the U.S. since 1934; the penultimate section discusses the broader applicability of the analytical framework across the empirical subfields of Political Science