A long standing view in the political economy of bureaucracy holds that the quality of political governance is the foundation of high quality development agencies. However, the existing literature does not provide an adequate account of how political leadership shape the capacity of development agencies. Motivated by the discrepancy between formal political institutions and large within country variation of bureaucratic governance in reality, this paper argues that the governing structure and capacity of development agencies crucially depend on the interaction between formal institutional constraints entrenched in the political system and the strength of political leadership. Specifically, neither institutional constraints nor strong leadership alone guarantees a sufficient degree of bureaucratic autonomy for development agencies. Without strong leadership, institutional checks and balance may give rise to excessive veto points in policy making and undermine
bureaucratic autonomy. Without proper institutional checks and balance, development agencies’ autonomy and capacity tend to compromised by the moral hazard of strong leadership. In turn, our theoretical argument predicts that development agencies exhibit strong autonomy and capacity with the presence of both strong leadership and institutional constraints. We use a crosscountry dataset of national development banks to test the theory. The regression results and case studies of national development banks are consistent with the theory.