Economic theory of the bureaucracy

The economic theory of bureaucracy is a branch of the New Political Economy (NPÖ) and tries to explain bureaucracy growth .

It tries, among other things, to describe the relationships and interactions of the publicly employed administrative employees with the political decision-makers of the government who are de facto superior to them and who act on behalf of the people . The basic question of this dispute relates to the description of the behavior of bureaucratic administrative authorities in democratic systems, taking into account their dependence on politics . To illustrate the mode of interaction just described, what is probably the central model approach for describing bureaucracy theory, the Niskanen model from 1971, is presented below .

Basic assumptions in the Niskanen model

The basic assumption in Niskanen's model is that a head of a public agency is particularly interested in maximizing the budget and output of his agency. Its utility function is monotonously increasing and is made up of the elements income, office equipment, prestige, power, patronage opportunities, output of the authority and the degree of comfort at work, whereby all of the factors just mentioned are directly dependent on the available budget. The bureaucrat is thus always striving in negotiations with the government to achieve the highest possible budgeting of its authority to mainly by the increase of its discretionary winning budget and the highest possible output in influence and power. However, the incentives of the chief bureaucrat are distorted because he does not have the option, as is usual in the private sector, to withhold the difference between the income and the costs himself. For him, the only thing that matters is to increase his utility by increasing the elements described above. To make matters worse, the politicians are too uninformed about the actual costs of providing a certain amount of the required service, which enables the bureaucrats to rate their service above the actually appropriate price, the marginal cost of production, to offer.

At this point, despite the fact that there is no explicit connection to Niskanen's model, it should be noted that the relationship between politics and bureaucracy is often characterized as a bilateral monopoly . In theory, on the one hand, the government is the sole buyer of the services generated by the administration. On the other hand, it is assumed that bureaucracy alone and therefore no private company can provide the services desired by politicians. It is also assumed that the administration only offers the services it produces as a complete package and therefore not, as is usual on the free market , at a unit price. The government's only option is to either accept or reject the entire package.

Use of budget in public company

Let us now assume that the utility function U of a chief bureaucrat depends on the quantity produced by his agency (output X) and his discretionary budget (the surpluses π achieved). Accordingly, its utility function is as follows: U = U (X, π)

Let us now distinguish three extreme cases:

(1) The chief bureaucrat only evaluates the amount of his discretionary budget π.

Then: UX = 0 and π> 0 is maximized. As under competitive market conditions, it is now the case that in the optimum the marginal costs of production correspond to the politicians' marginal willingness to pay. As a result, the amount Q1 is produced, but the funds provided by the client (politician) correspond to the area 0BCQ1, and thus a budget surplus of ABC arises. This budget surplus (the amount of money actually required to reach point Q1 is only 0ACQ1) is used by the bureaucrats to pursue other discretionary goals. In this case, the economically sensible amount Q1 is made available, but it is also produced inefficiently (operational or X-inefficiency).

(2) The chief bureaucrat only evaluates the quantity produced as increasing use and influence.

The following applies: Uπ = 0 and thus π = 0. The excess is set to zero. The maximum possible amount is produced with the available budget. Here the total willingness to pay of the politicians corresponds to the area 0BEQ2, while the total costs of production are symbolized by the area 0ADQ2. The excess ABC shown in case (1) is now used to cover the excess costs of the area CDE. The two triangles are therefore the same size. This extreme case is known as the Niskanen case. In this situation, production is economically efficient because the authority remains on its marginal cost curve , but the output is too high, which in return for and in contrast to (1) is economic inefficiency.

(3) The chief bureaucrat draws its benefit from the quantity produced and from the budget surplus.

The following applies: UX> 0 and Uπ> 0. This results in an optimal output quantity of Q *, which under the condition π *> 0 must be in the range between Q1 <X *> Q2. This case is probably the most realistic, because here the amount applied lies between the two extreme points, the competitive and the Niskanen amount. There is therefore operational as well as allocative inefficiency, since too much of the public good is offered, while the production costs are also too high.

Conclusions from the model

It should therefore be the aim of every government to control its administrative authorities as best as possible in order to minimize the waste of funds through overproduction and budget maximization. The main problem behind this control project, however, is the information asymmetry between government and administration. While the administrations know their cost structures, the politicians are dependent on pure estimates, which means that the cost reduction of the administrative apparatus to the minimum actually required is probably not feasible in practice. One possible solution to the problem of excess costs would be to break the monopoly of the administrative authorities and outsource the tasks to be carried out to private companies. The asymmetrical information relationship could thus be corrected in favor of the government.

Further models of the economic theory of bureaucracy

The Miqué and Bélanger model (1974)
The Williamson Model (1964)
The Holzinger model (1987)
The Magat et al. (1986)

literature

Bruno S. Frey / Gebhard Kirchgässner 2002: Democratic Economic Policy . 3. Edition.
Endres / Finus 1996: Determination of environmental policy goals in the field of tension between social interest groups . In Siebert 1996: Elements of a rational environmental policy.
Ulrich Roppel 1979: Economic theory of bureaucracy , Freiburg.