From Agency Problems to Public Value: Rethinking Budget Policy Innovation in Decentralized Governments

Decentralized governments increasingly rely on budget reforms to improve responsiveness and performance, yet the same discretion that enables adaptation can also amplify agency problems in the budgeting cycle. In many jurisdictions, mid-year budget adjustments and rebudgeting become politically contested spaces where information asymmetries, opportunism, and short-term electoral incentives may distort collective priorities. This conceptual paper reframes budget policy innovation as a governance mechanism that can shift decentralized budgeting from a control-centered logic to a public value orientation. Building on agency theory, stewardship theory, and public value governance, we develop an integrative framework explaining how participatory budgeting and adaptive rebudgeting can be designed as value-creation infrastructure rather than mere procedural compliance. We articulate a set of propositions linking (1) the severity of agency risks to the design of participation and transparency arrangements, (2) rebudgeting flexibility to organizational learning and policy experimentation, and (3) innovation capacity to the translation of fiscal decisions into public value outcomes such as legitimacy, equity, and service improvement. The paper contributes by clarifying the conceptual boundaries of “budget policy innovation” in decentralized settings and by offering a research agenda for empirically testing the proposed mechanisms across institutional contexts.