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A majority of US municipalities now operate under the council-manager form of government, an institutional design that creates a principal-agent problem as the elected council and appointed manager have divergent incentives. Although current scholarship on the council-manager relationship focuses on ex post municipal level outcomes, this study advances the literature by developing a theory of ex ante contracting between principal and agent at the local level. The theory predicts that increasingly constraining political environments are associated with a greater degree of contractually provided employment protection for incoming city managers. Using unique data on California municipalities and their managers, empirical analysis supports the theory’s predictions. Specifically, as the municipal electorate becomes more cohesive and less moderate and as municipal elections become increasingly competitive, city manager contracts include increasing protection from termination in the form of severance and political protection from termination. The empirical results suggest that employment protection serves an important role in the initial creation of a principal-agent relationship between manager and council by defining the cost council must bear if they terminate the manager and protecting the manager from career risk.
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