Bureaucracy and Government Failures

The state is not some abstract well-intentioned agent, but rather a collection of organizations with their own interests. Bureaucracy—the main instrument of state power—follows its own logic, which does not always coincide with the public good.

Economic Theory of Bureaucracy

William Niskanen proposed a model of bureaucracy as a budget maximizer:

Model Assumptions:

Bureaucrats maximize the budget of their agency
Budget is associated with prestige, power, salary, opportunities
Bureaucrats possess an informational advantage over politicians
Politicians cannot effectively control the bureaucracy

Result: bureaucracy produces more than is optimal, and at inflated prices. The public sector is systematically bloated.

Model Clarifications:

Bureaucrats may maximize not the total budget, but the discretionary budget (the portion that can be freely spent)
Bureaucrats value a quiet life, leading to risk aversion and avoidance of innovation
Career incentives influence behavior

Principal-agent Problem

Bureaucracy is a classic example of the "principal–agent" problem:

Hierarchy of principals: Citizens → politicians → senior officials → rank-and-file bureaucrats

At each level—there is potential to deviate from the principal's objectives.

Informational asymmetry. Bureaucrats know more about real costs and possibilities than their superiors. They can use this knowledge in their own interests.

Measuring outcomes. Bureaucracy outputs are often hard to measure. How much "security" does the police produce? How much "justice" do the courts deliver?

Weak incentives. Bureaucrats are protected from dismissal; their salary is not tied to performance. Incentives for efficiency are weak.

Government Failures

By analogy with "market failures," public choice theory identifies "government failures:"

Rent-seeking. Resources are diverted from production to the struggle for political rents.
Rational ignorance. Voters do not control politicians; policy diverges from the majority's preferences.
Short-termism. Politicians focus on the election cycle, not on long-term consequences.
Bureaucratic bloat. The public sector is larger than optimal.
Regulatory capture. Regulators operate in the interests of the regulated.
Absence of feedback. Without market signals (prices, profits), it is difficult to know whether resources are used efficiently.

Incentives in the Public Sector

Why do incentives in the public sector work differently than in the private sector?

Lack of competition. State agencies are usually monopolists. There is no competitive pressure to lower costs or improve quality.
Soft budget constraints. Inefficient bodies do not go bankrupt. On the contrary, problems are often "treated" by increasing the budget.
Absence of residual rights. In a private firm, the owner receives the residual profit—a strong efficiency incentive. A bureaucrat has no claim to "savings"—there is no incentive to economize.
Difficulty of dismissal. Protection of civil servants from arbitrary firing (important for independence) reduces incentives for diligence.
Career incentives. Bureaucrats are concerned with their careers. This creates an incentive for safe, conformist behavior and risk aversion.

Public Administration Reforms

How can the efficiency of bureaucracy be improved?

New Public Management. The movement of the 1980s–1990s for the application of managerial methods in the public sector: performance measurement, pay for results, competition, outsourcing.
Privatization and competition. Transfer of functions to the private sector where possible. Competition among service providers (vouchers in education).
Agencification. Creation of agencies with clear goals and autonomy. Contracts between ministries and agencies.
Performance budgeting. Funding tied to measurable outcomes, not expenditures.
Electronic government. Automation reduces discretion and corruption, increases transparency.

Limitations of Reforms

Public administration reforms encounter obstacles:

Bureaucratic resistance. Reforms threaten insiders' interests, who resist.
Difficulty of measurement. Many public sector outcomes are hard to measure. Measuring what is measurable distorts incentives ("teaching to the test").
Politicization. Reforms may be used for political purposes—to cut "wrong" programs.
Transaction costs. Contracts, monitoring, tenders—all incur costs. Sometimes hierarchy is more efficient than the market.

An ideal bureaucracy does not exist. As with the market, the question is not whether failures exist, but how to comparatively assess alternatives.