• Status: Working Paper

• Journal: TBA

• Details: [working paper] [supplementary materials]

• Date: April 2026

• Authors: Joseph Calderon

Abstract
Why do policies yield uneven returns across institutions? I examine this question through a principal-agent model of policy design under asymmetric information. I show that the optimal second-best policy must accept a trichotomy of compliance: low-capacity agents rationally under-comply, intermediate agents bunch at the mandate, and high-capacity individuals over-comply. Mandates and enforcement operate on distinct margins, as mandates shift the entire compliance distribution while enforcement exclusively targets under-compliers. Extending to a dynamic setting, I demonstrate that lack of commitment triggers a ratchet effect where high-capacity agents strategically suppress effort to avoid stricter future mandates. The optimal response is policy gradualism: regulators dampen updates to preserve long-term incentives. These results provide a structural foundation for designing adaptive regulatory systems under institutional heterogeneity.