A Model of Embedded Autonomy and Asymmetric Information

Abstract

We model the concept of embedded autonomy, introduced by Peter Evens, as an interaction between bureaucrats and entrepreneurs, where bureaucrats must approve projects proposed by entrepreneurs. Entrepreneurs are better informed about their own projects than are bureaucrats, but bureaucrats can receive signals about project quality from entrepreneurs. If bureaucrats and entrepreneurs are more closely connected, say through social ties, they receive more informative signals. However, greater closeness will simultaneously relax the standards for project approval. Hence, there is a tradeoff between these two effects of social closeness, which helps capture the concept of embedded autonomy.