Incentivizing Intermediaries: Discretionary Risk, Opportunities for Conflict, and Tailored Accountability

This paper deals with issues of discretion, conflicts of interest, and accountability of regulatory intermediaries. I suggest that what is recognized as a conflict of interest is unduly narrow because it is distorted by anticipation of a systemically problematic consequence of disqualification from acting. Actual conflicts of interest, in the sense of having incentives to approach the exercise of discretion in some way other than according to the guidelines associated with the grant of the discretion, are nearly unavoidable. The question then is how to regulate intermediaries exercising discretion such that the discretion is exercised as intended, rather than pursuant to ulterior motives. I suggest this is a function mainly of their relative accountability: they will tend to exercise their discretion as intended where they are accountable in such a way as to create a self-interest in doing so that exceeds their self-interest in acting on any combination of their incentives to exercise it according to other rationales. This is clearly demonstrated using officials of the legal system such as lawyers in private practice, criminal prosecutors, and judges.