How Rules and Compliance Impact Organizational Outcomes: Evidence from Delegation in Environmental Regulation

Formal rules within organizations are pervasive, but may be interpreted and implemented differently by actors within the organization, impacting organizational outcomes. We consider a delegation reform that changed formal rules within the environmental regulator in an Indian state, by giving decision rights to junior officers over certain types of application. Using novel data on firms' environmental permit applications and internal communications within the regulator, we study how the delegation of formal authority affects its actual allocation, the consequences for applicant firms, and the circumstances that lead senior officers to withhold this authority. The change in decision rights led to greater approval rates for applicant firms. However, only two thirds of applications that should have been delegated according to the rules were actually delegated. We show that senior officers chose to retain decision rights over more difficult applications, namely, applications with higher pollution potential. Furthermore, baseline disagreement with more subordinates' recommendations reduces delegation post-reform, and officers facing a higher backlog of applications are more likely to delegate. These results are consistent with a framework where the allocation of decision rights is determined by a knowledge hierarchy and where different senior officers face varying costs of delegation at different times.