Bureaucracy

The Budget maximising

Bureaucrat
Bureaucratic man pursues power
A bureaucrat is not rewarded for cutting costs
or saving money
A bureaucrat is not punished for overspending
Bureaucrats are spending other peoples
money

Economic man pursues profit

Both accrue to people with
information and owing to uncertainty

 In a perfect bureaucracy, with all

rules spelled out, there would be no
power
I might be in charge,
but I am still bound by the same
rules, I have no discretion
And without discretion, where is my
power
In this model, nobody ever makes a
decision,

 Managers convert their power into income

by having alternate goals for the firms
Directly answerable to stakeholders
Size and growth in size are goals to
earn more profits
Bureaus find it difficult to convert their
power into income
Bureaus also pursue goals such as size
and risk aversion

 William Niskanen (1971): first

systematic study of bureaucracies
within public choice framework
One of the key characteristics of
Bureaucracy is its non-market nature
of Output
Bureau does not supply a number of
units as such but levels of activities
from which output levels must be
inferred

 Example: Defence
Measurement Problem inherent in
the G&S provided by Public Bureaus
Creates monitoring problems for funding
agency-efficiency of production given
the un-measurable nature of output

 Bilateral Monopoly nature of Bureau-Sponsor

relationship
Agent (government) of all people who consume PG
is a monopsonist
Avoidance of wasteful duplication main reason for
bureaus to have monopoly in provision
Monopoly nature of bureaus frees them from
competitive pressure to be efficient and denies
the funding agency an alternative source of
information by which to gauge the efficiency,
thus compounding the monitoring problem

 Inefficiency of bureau services is

further induced by scheme of
compensation of bureaucrats-no
direct relation between efficiency
and incentive
Weak external control on
efficiency and weak internal
incentives

 If bureaucrat has no financial

incentive to pursue efficiency, what
are his goals??
And how are they related to
efficiency??

Possible goals of a Bureaucrat

(Niskanen, 1971, P38)

Salary
Perquisites of the office
Public reputation
Power
Patronage
Output of Bureau
Ease of making changes
Ease of managing the bureau

THE MODEL
B=B(Q),
B= Budget of a Bureaucracy
B(Q) = The bureaucracies budget is a function of the
quantity (Q) of services it provides
Assume dB/dQ > 0, and d2B/dQ2 < 0 ; B>0, B<0
(standard diminishing returns; Public benefit or utility
function, which increases but at a decreasing rate with
increasing output)
C=C(Q),
The bureaucracy also has a cost function, where
dC/dQ > 0, and d2C/dQ2 > 0; C>0, C>0 (increasing
costs, same as a competitive firm)

The Model
Cost Increases at increasing rate
over the relevant range of output
Cost schedule is known only to
members of bureau
Problem of monitoring

 The funder knows its total benefit schedule, but

sees only an activity budget from bureau.
Therefore it cannot determine whether this
output is being supplied at efficient levels
(MB=MC)
The funder sees the total budget and total
output
I know if TB = TC, but not if MB = MC
This frees the bureau to maximize its budget
subject to the constraint that its budget covers
the cost of production

 So the constraint faced by the

bureaucracy is different than for
a private firm. The bureaucracy
has to propose a budget where
total cost is less than total
benefit i.e. it has to cover the
cost of production. He does not
need to worry if MB = MC

So what is the objective function a bureaucracy

optimizes?

OB = B(Q) + (B(Q) C(Q))

First order yields
dB/dQ + dB/dQ dC/dQ = 0
or
dB/dQ + dB/dQ = dC/dQ
or
(1+)dB/dQ = dC/dQ
or
dB/dQ = (/(1+))(dC/dB)


B ' (Q )
C ' (Q)
1

 In the above is positive, and it represents

the marginal utility to the bureaucracy of
expanding the budget constraint.
Note that this is different than what the
funder wants: he wants dB/dQ = dC/dQ; i.e.
they want marginal benefit to equal marginal
cost (this is not derived from the above).
If is positive, it implies that the bureaucrat
will supply the service where
dB/dQ < dC/dQ

 Note that MB = MC at quantity QP.

This would be the publicly optimal
amount of the supplied good. It
would provide consumer surplus
equal to the Triangle where MB > MC.
However, the bureaucracy supplies
the good where total Cost equals
Total Benefit; QB. At QB, the triangle
where MB < MC is equal to the other
triangle, so TC is equal to TB.

 Can MB be Negative?
How elastic is Demand (marginal
benefits), and how much do we value
a minimal amount of the good?

 there is actually a portion of

production where the MB of more
good is negative, i.e. the public
(median voter) would prefer to NOT
have the good. Often times,
bureaucracies bundle unpopular (to
the public, not the bureaucrat) items
with popular ones, to make sure they
are purchased.

 Choosing a head of bureau an individual, who

was an executive in companies that sell to this
bureau strengthens the bureau interest in
larger budgets
Appointing representatives of high demand
users of the bureaus output (interest groups),
to the sub-committees charged with reviewing
the bureaus performance weakens the
potential of curtailing the expansion of
bureaus budget through this monitoring
process

 Do Governments provide
services at a higher cost than
private firms?