Formal rules are pervasive in organizations, but may be implemented differently by different actors, impacting organizational outcomes. Combining novel data on firms’ environmental permit applications and internal regulatory communication with a natural experiment and a model, we study how the delegation of formal authority affects its actual allocation, the consequences for applicant firms, and when de jure and de facto allocation of authority diverge. Delegation caused greater approval rates for more polluting firms. However, only two thirds of applications that should have been delegated were actually delegated, creating a gap between de jure and de facto regulation. Baseline disagreement with subordinate officers reduces delegation post-reform, and senior officers chose to retain authority over more difficult applications. We present a framework to develop testable predictions about the decision to delegate, where the allocation of decision rights is determined by cautious senior officers. These results can help understand differences in de jure vs. de facto implementation of rules and regulations, as well as the mechanisms underlying the differences between them