Autonomous agencies and relational contracts in government bond issues

In this article, we examine how national Debt Management Offices (DMOs) in developed countries handle governments’ relational contracts with lenders, which are characterized by potentially important information asymmetries. In response to privileged information, the DMO can adjust the maturity of the auctioned debt perfunctorily – signaling defection from the win-win spirit of the contract – or consummately – signaling the government's cooperative attitude, and earning the trust of the lenders. We argue that politically autonomous DMOs have more credibility with lenders and can afford less consummate signals. Depending on the electoral cycle and party age, cabinets can press moderately autonomous DMOs to send less consummate signals, but will be less successful with non-autonomous DMOs, because of their low credibility. We run fixed effects regressions on a unique dataset based on more than 27,500 issues of government debt in 31 mainly Organisation for Economic Co-operation and Development countries during 2004–2012, and a unique compilation of legal texts defining the authority of DMOs.