A Test of the Political Control of Bureaucracies Under Asymmetric Information

How does the informational role of interest groups interact with institutions in the political control of the bureaucracy? In 1992, Banks and Weingast argued that bureaucrats hold an informational advantage vis-a-vis political principals concerning variables with direct policy relevance, and that an agency can exploit this information if it chooses to do so because politicians and bureaucrats interact in a world of asymmetric information. They show that when the politician's cost of auditing the agency is high, the agency can extract more, and politicians anticipate this by adapting to it in their design of agencies. Auditing cost depends on the technology available for monitoring, and the ability of an interest group to monitor the agency's choices and performance and relay that information to politicians. The informational advantage is reduced - the agency is more likely to "tell the truth" - when a low-cost monitoring technology is available, and when the group is cohesive enough to participate in monitoring. I test this hypothesis using data on bureaucratic statements on the importance of a series of public policy problems using a cross-section of state-level environmental agencies. I show that importance statements are aligned with objective circumstances when both conditions are satisfied: when the technology is present and as the interest group becomes concentrated. The bureaucracy's informational advantage collapses under these conditions, and the statements conform to those in a "truth-telling" equilibrium