Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
Bureaucracy, Monopoly, and Competition: A Critical Analysis of the Budget- Maximizing
Model of Bureaucracy
Author(s): John A. C. Conybeare
Reviewed work(s):
Source: American Journal of Political Science, Vol. 28, No. 3 (Aug., 1984), pp. 479-502
Published by: Midwest Political Science Association
Stable URL: http://www.jstor.org/stable/2110901 .
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Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
and Competition:
Bureaucracy,
Monopoly,
A CriticalAnalysisoftheBudget-Maximizing
Modelof
Bureaucracy*
JohnA. C. Conybeare,
ColumbiaUniversity
Niskanenhas arguedthatif government
bureausact so as to maximizetheirbudgets,they
will alwaysproducean outputgreaterthana privateindustry,
losses to
resultingin efficiency
society.Since thebudget-maximizing
modelrelatesto a numberof intersecting
areas of organito notethe limitations
of the model.
zationalanalysisfromseveraldisciplines,it is important
First,Niskanen'sresultis onlytruefora bureauwhichcan exerciseperfectpricediscrimination
in its relationship
withits financialsponsor;wherethisis notthecase, thebureaumayproduce
variationis introduced
less thana privateindustry.
Second, further
by examiningtheeffectson a
A bureauwhich
bureauofspecializedresources,publicgoods,competition,
andlowproductivity.
wouldotherwiseproducean outputin excess of the competitivelevel will, whenany of these
factorsare present,producean outputcloserto the competitive
output.These resultsmayalso
sincemajorindustrial
countries
arefavoring
havesignificant
policyimplications,
policiestoreturn
somegovernmental
activitiesto theprivatesector.
Introduction
Social theorybased on the assumptionthatindividualsmaybe rational
utilitymaximizersand rent(profit)seekershas rapidlymade inroadsintothe
traditionalpreservesof political science, havinga methodologicalimpact
whichRogowski(1978, p. 296) referred
to as "the fourthgreatscientific
of thepast century."One of thenexttasks,recentlysuggestedby
revolution
Riker(1980), will be to integrate
rationalchoicetheoryintotheframework
of
institutional
politicalscience. The explanationof bureaucraticstructure
and
behaviormaybe a usefularea in whichto pursuesucha task,sincethevarious
bodies of literature
on bureaucracyappearto sharesome commonconcerns
in nonmarket
(e.g., thebehaviorof institutions
contexts).
Niskanen's BureaucracyandRepresentative
Government
(1971) was seen
by manyto have made such progressin thistask thatone politicalscientist
statedthat"therecan be no questionthatit is themostsignificant
workyet
in thedetermination
producedby an economiston therole of bureaucracy
of
thesupplyofpublicgoods and services" (Mitchell,1974, p. 1775). Niskanen
arguedthata simpleassumption(viz., bureaucratsmaximizebudgets)produces a powerfulpredictivehypothesis:a bureauwill alwaysproducemore
thana privatemarket,up to twice the outputof a competitiveindustry
and
fourtimestheoutputof a monopoly.Not since theworkof Davis, Dempster,
and Wildavsky(1966), whichused first-order
autoregressions
to predictthe
ofU.S. government
appropriations
agencies,hadwe seena quantitative
theory
*The authorthanksFredThompsonandfiveanonymous
referees
fortheircomments.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
480
JohnA. C. Conybeare
of bureaucracywhichappearedto be bothtestableand applicableto a wide
In a recenttypologyoftheliterature
rangeof institutions.
Peters(1981) listed
the"public choice" themeas one of thethreemaincontemporary
approaches
to thestudyof bureaucracy.
BudgetMaximizationin the Bureaucracy Literature
ofpublicpolicynotonlybecause
to students
Niskanen'sworkis important
of its theoretical
butalso because it overlapswith
parsimonyand testability,
and because of its relevanceto curotheranalyticapproachesto bureaucracy
rentpolicyissues in developedcountries.
ExplainingBureaucraticBehavior
The budgetmaximizationmodel maybe seen as one of the theoretical
developmentsstemmingfromthe sustainedcritiqueof Weberianmodels,
whichhas dominatedmuchof theliterature.
Emphasizingtheneed formacro
in
in bureaucratic
and assumingthatmicrorationality
rationality
structures,
Weberdrew
individualbehaviorwouldfollowfroma rational-legal
structure,
criticismfromlatergenerationsof scholars(such as Blau, 1955; Merton,
1940), whodrewattention
to a fallacyof composition.Rational-legalbureaumicrocraticstructures,
theysaid, do notnecessarilylead to theappropriate
levelbehavior,sincetheformsof behaviorwhichare bestfortheorganization
maynotbe so fortheindividualbureaucrat.Hence muchof themodernliteratureexplainsbureaucracyin termsof individualrent-seeking
(i.e., wealth
redistribution)
eitheron the partof groupsoutsideof the bureau(e.g., the
"capture" and "producerprotection"theoriesof industry
regulation)or by
individualsor groupswithinthebureau.
Niskanen'smodelis, forexample,closelyrelatedto Downs's (1967) earlier,dynamic,and moreexpansiveanalysisof bureaus,sincebudgetmaximization is one of the severalelementswhichDowns postulatedto be in the
bureaucrat'sutilityfunction,
particularly
duringthebureau'searlyyearswhen
it will be dominatedby "climbers" who see budgetmaximization
as beneficial to theircareers.The budgetmaximizationmodelalso overlapswiththe
"bureaucraticpolitics" approachpopularizedby Allison (1971), again because this literaturehopes to explain policy in termsof the interaction
of
variousbureauseachpursuingitsownselfishgoals, amongstwhichis thegoal
of budgetmaximization.
Niskanen'sworkis also directlyrelevantto thethemeof elucidatingthe
ofpubdifferences
betweenpublicandprivateorganizations.
The mainstream
lic administration
literature
has mostlyemphasizedthe similaritiesbetween
public and privateorganizations-basedon interorganizational
dependence
technicaland managerialstaffs,imitation
(e.g., regulation),interchangeable
of organizationalstructures,and similaritiesof functions(see Nadel and
Rourke,1975, pp. 399-411). Recentanalyseshave suggestedthat"it is prematureto discountthe significanceof public-private
differences"(Rainey,
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY, MONOPOLY, AND COMPETITION
48I
Backoff,and Levine, 1976, p. 233), and elaboratedon a numberof areas
(e.g., exposureto marketforces,complexityof objectives,employeeincenThe budget-maximizing
tives)wheretheyshoulddiffer.
bureaumodelis consonantwiththislattertheme,despitehavingits originsin sales-maximizing
modelsof privatefirmbehavior.
Prescriptions
forOrganizationalDesign
Niskanenimplicityfocusedattention
on theneed forthedevelopment
of
a publicsectorcounterpart
to the"corporatestrategy
and structure"literature
(surveyedby Caves, 1980), whichexaminesthe connectionsbetweenlongtermcorporatestrategiesand organizational
structure.
Clearlythe"corporate
strategies"of governments
requireattention
to questionsof organizational
do behavein waysthatNiskanenhas ascribedto them.
designif bureaucrats
and structure
Muchof thestrategy
literature,
however,fitsmoreintotheWeberiantradition
of ignoringrent-seeking
behavior,treating
organizational
design as a problemof matchingenvironmental
parameterswith corporate
objectivesso as to determine,for example, when an organizationshould
The difficulties
structure.
of
changefroma functionalto a multidivisional
rationalistic
implementing
changesin bureaucracies(e.g., systemsanalysis,
have been at least partlydue to thisintelplanning-programming-budgeting)
of individualbureaulectualgap betweenrationaldesignand themotivations
crats.
The problemof strategic
behavioris connectedwithanotherbodyofprewhichis morecloselyrelatedtoNiskanen'swork,particularly
scriptive
writing
in itsemphasison individualrent-seeking
behaviorratherthanmacro-organiThis is the "principal-agent"literature
zationalstructures.
(see Alchianand
of
Demsetz,1972; Ross, 1973; Fama, 1980) whichexaminestheimplications
different
systemsof property
rightsforintra-organizational
bargaining.Most
of thewritingis prescriptive
in intent,dealingwiththeproblemof designing
intra-organizational
contracts
(or "team production"as AlchianandDemsetz
call it) so as to maximizethe "residual rewards"accruingto theownersof
theorganization(the "principal") fromthe activitiesof theemployees(the
bureaucrat
"agent"). In Niskanen'smodeltheagentis thebudget-maximizing
and theprincipalis whathe refersto as the"sponsor" or "collectiveorganization." The sponsoris ultimately
theelectorate(theshareholders
in thebody
thesponsoris morelikelyto be anothergovernpolitic),thoughoperationally
mentalgroup(e.g., budgetoffice,cabinetorexecutiveoffice,legislativecommittee).Niskanen'sbureauis a case wherethebureaucrat'slack of an explicit
leads him
property
rightin anypecuniarysurpluscreatedby theorganization
to exploitthebargainingpowerin his contractwiththesponsor.
Bureaucracyand Society
Muchof theolderpost-Weber
workon publicbureaucracy
dealtwiththe
of thebureauto societyas a problemof meshingthebureaucracy
relationship
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
482
JohnA. C. Conybeare
to certaingeneralneeds, such as leadership(Selznick, 1957), or to cultural
characteristics
uniqueto certaincountries(e.g., Crozier,1964; Bendix,1949;
LaPalombara,1963). Othershave concentrated
on the narrower
questionof
theextentto whichpublicbureausaccuratelyreflectthedistribution
of class
interests
in society(Meier,1975) and thepublicconstituencies
to whichbureaucratsappeal (Nadel and Rourke,1975, pp. 390-99). The budgetmaximizationmodel can contribute
littleto thistypeof analysis,since the model
impliesthatbroadersocial norms,values, and class interests
are irrelevant
to
therent-seeking
bureaucrat;anycongruencebetweenthemwill be purelyfortuitous.The thrust
ofthemodelsuggeststhatbureaucratic
rentsaremostlikely
to havea zero-sumrelationship
to thewelfareoftherestof society.The model
is, however,
relevantto twootherareas of concern.
Thereis now a huge body of research(surveyedin Larkey,Stolp, and
Winer,1981) attempting
to explaintheseculargrowthofgovernment
in Westernsocieties.The budgetmaximization
modeldoes notbyitself,as Millerand
Moe (1983, p. 297) have recentlysuggested,give any explanationof this
growth,sinceit is a theoryof thelevelof government
ratherthan
expenditure
itsgrowth.The modelonlycontributes
to thedebateinsofaras it suggeststhat
anysecularincreasein thepowerof bureaucrats
(e.g., federalcentralization)
will cause government
outputto growrelativeto a hypothetical
competitive
output.Budgetmaximization
has formed
partofmoremathematically
complex
modelsof thegrowthof government
in a dynamicgeneralequilibriumframework(e.g., van Windenand van Praag, 1981).
Finally,Niskanen'sbureaufitsin withthetheoriesof "institutional
weakness'" (Peters,1981, pp. 61-63), whichidentify
bureaupowerwiththeweakness of othersourcesof government
due to theoverloadofdemands
authority,
on democraticgovernments.
These theoriesare in turncloselyconnectedwith
thepopulist,neoconservative
backlashagainstthewelfarestate,whichhas as
one of its components
an anti-bureaucratic
sentiment
focusingon thetax and
spendingimplications
ofbureaucratic
growth(see Wilensky,1976). Morespecifically,Niskanen'scomparisonof public and privateoutputis especially
relevantto thedesignsof some developedcountriesin sellingoffstateenterprisestotheprivatesector.Britain'sConservative
has sold Britoil,
government
Cable and Wireless,BritishAerospace,and theNationalFreightCorporation
and intendsto sell BritishAirways,theBritishNationalOil Corporation,
BritishTelecom,theNationalEnterprise
Board,RollsRoyce,BritishSteel,British
Leyland,BritishShipbuilders,the Royal OrdnanceFactories,and some airports.In CanadathelastConservative
primeminister
promisedto sell offPetro
Canada, Canadair,De HavillandAircraft,
andEldoradoNuclear.The lastLibin Australialargelydismantledthenationalhealthinsurance
eral government
scheme(Medibank)and made tentative
movesto deregulatethedomesticair
passengermarket,
owncarrier(TransAustraliaAirexposingthegovernment's
lines) to morecompetition.
Niskanen'smodelwouldpredictthatprivatization
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY,
MONOPOLY,
AND COMPETITION
483
shouldcause outputto fall,resultingin a welfaregainsto societyin theform
of greaterallocativeefficiency.
ofNiskanen'smodel,
Itis thepurposeofthispapertoreviewthestructure
of
withrespectto plausiblechangesin theassumptions
examineitsrobustness
empiricalevidencemaybearuponthemodel
themodel,andconsiderwhatever
about
His resultsdependcriticallyon an initialassumption
oritsassumptions.
often
bureaubargainingpower,and whenone considersothercontingencies
supplythereis evenless likelihoodof obtaining
associatedwithbureaucratic
his results.The sectionbelow beginsby examiningthe logic of the budget
power.Submodeland theassumptionaboutbureaubargaining
maximization
sequentsectionsexaminetheeffectsof specializedresources,publicgoods,
willaffect
showinghowthesecontingencies
andlowproductivity,
competition,
bureauoutput.
Niskanen's Budget MaximizationModel and Bureau Power
the
Niskanen'spremiseshave been criticizedas unrealistic,particularly
leads themto maxtwoassumptions
thatutilitymaximization
by bureaucrats
withits
of thebargainingrelationship
imizebudgetsand his characterization
financialsponsor(e.g., Margolis,1975; Rogowski,1978, p. 311). Migue and
Belanger(1974) have alteredNiskanen'smodelto includemotivesthatlimit
thebureaucrat'sdesireto maximizebudgets.BretonandWintrobe(1982, pp.
94-99) haveargued,in an analogywiththeCoase theorem,thatcompetitive
withinbureausmayremovetheincentiveto
amongstbureaucrats
rent-seeking
maximizebudgets.Manyorganizational
analystswouldcontendthatthenature
ofpublicbureausmakesitimpossibleto deduceanybehavioralcharacteristics
fromthe utilityfunctionsof individuals,thoughsalientexceptionsmaybe
found(e.g., Thompson,1981). This paperwill notquestionthepremisethat
a briefelaboration
tomaximizebudgetsbutwill,following
bureaucrats
attempt
of thebasic model,discusstheimplicationsof Niskanen'sassumptionabout
bureaubargainingpower.
Model
TheBudgetMaximization
Niskanendescribedbureausas "nonprofitorganizationswhichare fiorgrant"(Niskanen,1971,
nanced,atleastinpart,bya periodicappropriation
andproduce
by appropriations
p. 15). A purebureauwill be financedentirely
an outputthatis deliveredto thesponsorfreeof chargeson individualunits.1
His basic premiseis that"bureaucratsmaximizethe totalbudgetof their
mustbe
thatthebudget,
bureauduringtheirtenure,subjectto theconstraint
equal to the minimumtotalcosts of supplyingthe outputexpectedby the
bureau'ssponsor" (Niskanen,1971, p. 42). The sponsoris that"collective
IThe sponsormayor maynotdelivertheproductfreeof chargesto endusers,whichdepends
theextent
ofpublicness(meaningprimarily
on theextentto whichthegoodhas characteristics
partly
discussedat greater
towhich"freeriders"can be chargedforthegood,a problem
lengthbelow).
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
484
JohnA. C. Conybeare
organization"which acquires the bureau's outputin exchangefor a total
budget.
The modelis illustrated
in Figure 1, showingthebureau's totalbudget
revenue("budget-output,"
to use Niskanen'sterm)andcostcurves,assuming
quadratictotalbudgetrevenue(TRB) and totalcost (TC) curves,withlinear
FIGURE 1
The OutputDecisionoftheBureau
|TC
Value
TRM~~~~~R
$IQ
(Q)
~~~~~~~~~~~Quantity
Mc
AC
X
X
P2 -~~~~~
Ii
Pi
I
M
ARB~~
~~MRB=ARm
I
B3 C
B
B2
Q
TC = cQ + dQ2;AC = c + dQ; MC = c + 2dQ; TRB = aQ - bQ2; TRM= aQ - 2bQ2;
ARB= a - bQ; MRB = ARM= a - 2bQ; MRM= a - 4bQ.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY, MONOPOLY, AND COMPETITION
485
thatthe
average(ARB,AC) and marginal(MRB, MC) curves.2The constraint
bureaunotmakea loss meansthatit will producean outputat whicheither
bureau,as Niskanencalled it)
MRBequals zero (the "demand-constrained"
occursat the
bureau),whichever
orAC equals ARB(the"budget-constrained"
loweroutput.In Figure 1 thebureauis budget-constrained
and will produce
B1, sinceit cannotmaximizethebudgetat B2 due to thezero-lossconstraint.
Assumingthatthebureau'smarginalrevenue(MRB)is also thedemandcurve
(ARM)whichwouldbe faced by a privatefirm,the bureauwill producean
outputthatis alwaysgreaterthana privatemonopoly(M in Figure 1) or a
implicationof themodelis thatthe
industry
(C).3 An important
competitive
gains
and thattherewill alwaysbe efficiency
bureau'soutputis supraoptimal
marketsupply.4
fromchangingto competitive
It was notedabove thatthebureau'ssponsorcould rangefromtheentire
bureau,thoughthemodelappearsto be robustwith
electorate
to simplyanother
Romerand Rosenthal(1979) haveexploreda
respectto sponsorspecification.
and is able to presentthemwith
modelin whichthebureaufacesvotersdirectly
and a predetermined
a choice onlybetweenthe bureau'sdesiredexpenditure
whichwill prevailif thebureau'sproposalis rejected.
expenditure"
"reversion
condiwillbe greater
thanundercompetitive
Theyfoundthatactualexpenditure
is less thanthatdesiredbythe
whenthereversion
expenditure
tions,particularly
shouldstrengthen
thistenof highinflation
medianvoter.The recentexperience
levelof spending.
therealvalueofthereversion
dencybyreducing
Empirical Evidence
testing
Niskanen
(1975, p. 638) notedthattherehavebeenno studiesdirectly
his owntime-series
teston bureauapproprioffering
theoversupply
hypothesis,
2The totalrevenue
outputs,
curve(TRB)showsthetotalbudgetobtainedbythebureauatdifferent
thatthebureau'ssponsorenjoysdecreasing
theassumption
slopereflecting
a positivebutdiminishing
marginalutilityfromthebureau'soutputand will onlypay a decreasingbudget"price" perextra
at different
outputs,a
unitof output.The totalcost curve(TC) showsthetotalcost of production
of increasing
costs.The averagecurves
marginal
theassumption
slopereflecting
positive,increasing
curves(MRB,
(ARB,AC) showtheaveragebudgetrevenueorcostperunitofoutput,andthemarginal
of increasing
to totalbudgetor costsas outputincreases.Niskanen'sassumption
MC) theincrement
costsis notnecessaryto obtainanyof theresultsshownin thispaper.Figures2-6 assumeconstant
simplicity.
costs,forthesakeofdiagrammatic
3The competitive
willequatelong-run
supply(averagecost,AC) anddemand(average
industry
MRB) (see
revenuefortheprivatemarket,
ARM,also equal to thebureau'smarginalbudgetrevenue,
of theminimum
market
supplycurveis theaggregation
Niskanen,1971,pp. 59-68). The long-run
In a recentarticle,MillerandMoe (1983) err
averagecostsof all thefirmsin theindustry.
long-run
will maximizethe
supplycurve.The monopolist
marginal
costas themarket
in specifying
long-run
wheremarginalcostequals privatemardifference
betweentotalrevenueand totalcosts,producing
averageand marginalcurvesto thebureau
different
ginalrevenue(MRM).The reasonforimputing
and privatemarket(i.e., ARM? ARB, MRM# MRB) will be explainedin thediscussionof price
below.
discrimination
4The levelofproduction
ofresourceallocationis wheredemand
whichmaximizestheefficiency
output
output.Movingto thecompetitive
supply(AC), thatis, thecompetitive
(ARM)equals long-run
exceedcosts),thoughthesegainsare not
will producesocial welfaregains(i.e., netsocial benefits
offandno actoris worseoff).
(i.e., at leastone actoris better
necessarily
Pareto-optimal
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
486
JohnA. C. Conybeare
he showedthatin some
mergers,
ations.Usinga dummy
variableforbureaucratic
cases bureauswhichare combinedgetbudgetslargerthaniftheyhad remained
separate(Niskanen,1975,pp. 640-43). He tookthisas evidencethatlargersize
increasesbureaupowerand raisesoutput.A bettertestwouldbe evidencethat
theelasticity
of thebureau'saveragerevenue(ARBin Figure1) is equal to or
and Deacon,
Much empiricalevidence(e.g., Borcherding
greaterthanunity.5
1981) has suggested
1972;Deacon, 1978, 1979; McMillan,Wilson,andArthur,
thattheseelasticities
are less thanunityforstateand local publicexpenditures.
on local education,health
Exceptionscitedin thestudieswerestateexpenditure
on
and hospitals(Borcherding
and Deacon, 1972, p. 898), local expenditure
in smallcommunicipalcourts(Deacon, 1978, p. 190), and local expenditure
munities
onrecreation
andculture(McMillan,Wilson,andArthur,
1981,p. 602).
McGuire's(1981) surveyof severalempiricalstudiesfoundthatin threestudies
weregreater
thanunity,
implying
that
reporting
19 elasticities,
only6 elasticities
bureauoutputsaremostlyin excessofthatwhichwouldmaximizebudgets!
In general,theempiricalstudiesofferlittlesupportforthebudgetmaximithisis becausemoststudies
zationhypothesis.
McGuire(1981, p. 319) suggested
wheresponsorshave moreinformation,
power,and
are of local governments,
inbudgetdecisionsthanmayexistinfederal
bureaus.Yetwhyshould
involvement
sponsorswishto forcebureausto producein excessof thebudget-maximizing
outputthatthesponsorshould
level,whichis alreadygreater
thanthecompetitive
One answermaybe thatif thebureauhas less bargaining
powerthanis
prefer?
thanthat
outputmaywellbe greater
attributed
to itbyNiskanen,thecompetitive
ofthebureau.
Bureaucratic
BargainingPower
Theapparent
may
inconsistency
betweentheevidenceandmodelpredictions
be due to thecontingent
theoretical
relevanceof Niskanen'sconclusion.Aside
fromtheproblem
ofwhether
desiretomaximizebudgets,thereis the
bureaucrats
notionof monopolistic
criticalto theoverproduction
result.
pricediscrimination,
Niskanen
thesponsorwithan "all ornoththatthebureaucan present
presumed
ing" offerof a givenoutputfora givenbudget,on thegroundsthatthesponsor
has nowhere
else to go, whichamountsto assumingthatthebureauexercisesthe
The consumersurplus
nonmarket
equivalentof perfectprice discrimination.6
S The elasticity
(percentchangein outputdividedby percentchangein averagerevenue)along
thebureau'saveragerevenuecurveis greaterthanone to theleftand less thanone to therightof
output
B2, thepointofunitary
elasticity
(MRB= 0). Production
beyondthepointofunitary
elasticity
willreducethebureau'sbudget,sincea 1 percent
increasein outputproducesa greater
than1 percent
fallin averagebudgetrevenue,
in a fallin thetotalbudget.
resulting
6The difference
betweenthedemandcurveandthemarket
priceis knownas consumer
surplus.
It is thebenefit
accruingto consumers
whenthemarket
priceis less thanthedemandprice(theprice
consumers
wouldbe willingto pay)overtherangeof outputfromzeroto theactualoutput,thelast
unitofoutputbeingtheonlyone forwhichtheconsumer
paysthefulldemandprice.Perfect
(orfirstis able to chargeconsumers
degree)pricediscrimination
existswherea monopolist
theirfulldemand
priceforeach unitof output,thehighestpricebeingon thefirstunitandtheloweston thelastunit.
toproducer
The normaltriangular
areaofconsumer
surplusis thustransferred
revenues,
raisingtotal,
average,andmarginal
revenue
fortheproducer.
In thecase ofperfect
pricediscrimination,
themarket
demandcurvenowalso showstheproducer'smarginal
revenue.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY,
MONOPOLY,
AND COMPETITION
487
whichwouldaccruetothesponsorifthebureauweregivena constant
budgetper
unitof outputis appropriated
by thebureauas extrabudgetrevenue,sincethe
bureauis able to chargethe sponsorforeach successiveunitof outputat the
sponsor'sdemandprice(ARM)by offering
onlya totaloutputfora totalbudget.
Hencein Figure1 theintersection
of thebureau'saveragerevenuecurve(ARB)
withthehorizontal
axis is twicethedistancefromtheoriginas is theaverage
revenuecurveforalternative
market
forms(ARM,themarket
demandcurve),so
thatARMequalsMRB. Similarly,
thetotalrevenuecurveforthebureau(TRB)is
higherthanthatof a privatenon-price-discriminating
firm(TRM).7
Niskanencharacterized
therelationship
betweenbureauand sponsoras one
ofbilateral
monopoly
(singlebuyer,
singleseller)buteffectively
reducedittoone
ofmonopoly
nopowertothesponsor.BretonandWintrobe's
byattributing
(1975)
suggestion
thatsponsorswill investin devicesto controlbudgetmaximization
doesnotproducea determinate
outputsolution,sincethebureauwouldno longer
be maximizing
itsbudgetsubjectto a constraint
tothemodel.Others
endogenous
believethatcontroldevicesare an ineffective
wasteofresources(Thompsonand
thereappearstobe evidenceintheorganizational
Zumenta,1981),though
design
literature
that"conforming
behavior"can be inducedby centralization
(Child,
1973). Miller(1977) offereda model in whichbureauand sponsorare in a
Prisoners'
ofrewards
Dilemmagamewithregardto theprovision
bythesponsor
andcompliance
bythebureau.
Thompson(1973, p. 951) arguedthatif,as Niskanenassumed,thesponsor
knowsitsowndemandbutnotthebureau'scosts,itcouldoffer
a constant
budget
perunitof outputequal to thesponsor'sdemandpricealongARM,at whatever
B1 fora budgetof
outputis offered
bythebureau.Whenthebureauoffers
output
B1P3(Figure1), thesponsorwill granta budgetof B1PI, forcing
thebureauto
eitherreduceitsoutputoffer
toB3 fora budgetofB3P2 ortorefuseto supplyany
retainsa realisticaspectof themodel(viz., that
outputat all. The modification
ofa bureau'scosts),whilerestoring
sponsorsarehampered
a plausbyignorance
ibledegreeofbilateralmonopoly,
producing
signficant
changesfromNiskanen's
Millerand Moe (1983) used theconstant-unit-cost
originalpredictions.
ruleto
on budgetmaximization,
generatea legislativeconstraint
thoughtheiroutput
are distorted
of thecompetitive
predictions
by an incorrect
specification
output
(see footnote
3).
Assumingthesponsoris able to prevent
pricediscrimination
by themeans
suggestedabove, bothbureauand privatemarketswill face the same demand
(ARM)and marginalrevenue(MRM)curves.The bureaushownin Figure1 becomesdemandconstrained,
producing
B3 (whereMRM= 0), whichis less than
=
thecompetitive
outputC (whereARM AC). The case of a budget-constrained
bureauis shownin Figure2: thebureauandcompetitive
outputsshouldbe iden7 An inconsistency
occursherein Niskanen'sdetermination
of themonopoly
output:ifthemonopolybureaucan exercisepricediscrimination,
whyshoulda privatemonopolist
notdo thesame?
In thiscase, themonopoly
outputwouldbe closerto thecompetitive
whenthemonopolist
industry
equatesMC withtheprice-discriminating
marginal
revenuecurve(MRB).
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
JohnA. C. Conybeare
488
FIGURE 2
Bureau
Budget-Constrained
Non-Price-Discriminating,
$IQ
MC, AC
I
I
l
I \MR
I
M
I
\
\X
B =C
Q
output
tical.Theevidencethatbureausproducemorethanthebudget-maximizing
bureausoperwiththeexistenceof demand-constrained
appearsto be consistent
atingundersomepressurefromsponsorsto increaseoutputtowardthecompetitivelevel.
SpecializedResources
In Weberianmodelsthepossessionof specializedknowledgeis one of the
of a bureau(Weber,1964,pp. 337-41). CriticsofWeber
characteristics
defining
forbureausby theexistenceof technicalexpertise,
created
notedtheproblems
(e.g., Parsons'sintropowerandexpertise
betweenhierarchical
suchas conflict
on
A
microeconomic
perspective
1964).
Crozier,
ductionto Weber,1964,p. 59;
by
expertise
of
bureaucratic
other
implications
shed
on
light
may
bureaucracy
itas a specializedfactorofproduction.
treating
in whichtheyare employed
Resourceswithno use outsideof theindustry
Dowell (1979) has
in
market
structures.
between
output
reduce
differences
may
in a competshownthatspecializedresourceswillreducethegainsfrommerger
forthecreationof a monopolyor oligopoly.Therewill be a cost
itiveindustry
preventing
becausefactors
cannotbe soldwithout
inreducing
output
disadvantage
fromreducingoutput,since factorscan be sold onlyto
thecollusiveindustry
1980,pp. 259(see also Porter,
someonewhowantstoproducethesameproduct
costofbuying
due tothepotential
60). Outputexpansionwouldalso be inhibited
If
resourceswhichmaynotbe salablein theeventof futureoutputreductions.
therewill be, at the
specializedresourcesmustbe used in fixedproportions,
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY,
MONOPOLY,
AND COMPETITION
489
existingindustry
in thecostcurves,thesize of
capacity,a verticaldiscontinuity
whichwill dependon theimportance
of specializedresourcesin theproduction
processandtherateat whichresourcescan be depreciated
(sincetheyno longer
carrya costpenaltywhenfullydepreciated).8
Bureausmayhavebothspecializedlaborand capital,reducinganyoutput
changesfromprivatization.9
Labor maybe specializedfortwo reasons.First,
bureaucrats
havegreater
security
of tenurethanprivateemployees,
makingthem
specializedinsofaras theycannotbe dismissed.Sale of thebureauto private
enterprise
mayreducethisaspectof specialization,
thoughprivatization
would
mostlikelyinvolvejob guarantees
andthetransfer
of benefits
costlyto a private
firm.Second,bureaucrats
maybecomespecializedin proportion
to theamount
oftimetheyspendin thebureau(NadelandRourke,1975,pp. 374-75, 389) and
maybecomelockedintoa careerpaththatreducestherelativevalueof outside
employment
(see Black, 1972). Downs(1967, p. 95) also notestheconstraining
of specialization
effect
on bureaucrats
hopingto "jump" to otherorganizations.
BretonandWintrobe
(1975, p. 206) believethatspecializedbureaucrats
willhave
moreincentive
to maximizebudgetsif theycannotearnrewardsby movingto
another
agency.Largeorganizations
withthetransexperience
greater
problems
flows(Williamson,1967), reinforcing
actioncostsof information
theeffectof
divisionoflaborinproducing
skillsthatmaybe hardtotransfer.
Bureaucrats
may
thushavebothtenureand a disinclination
to seek alternative
employment,
especiallyas thebureauages andbecomespopulatedwitha higherproportion
ofwhat
Downs(1967) referred
to as "conservers.'"10
8 Fixedfactor
proportions
arenotnecessaryforspecializedresourcesto carrya costpenalty,
but
arerequired
toproducethediagrammatically
simplevertical
incostsandalso toproduce
discontinuity
cornersolutions,suchas a monopolyoutputwhichremainsat thecompetitive
output(see Dowell,
1979).
9 Bureausdo notnecessarily
suffer
fromspecializedresourcesanymorethanothermarket
structures,sincetheirexistenceis morea function
of thetypeof productin question.The importance
of
specializedfactors
herelies notin anyclaimthattheyare a distinguishing
feature
betweenpublicand
butsimplythattheywill imposea costpenaltyon anychangein output,suchas
privateenterprise,
mightotherwise
occurwhenthebureauis turned
overto privatefirms.
10Considerations
of portfolio
diversification
to be morespemightalso encouragebureaucrats
cialized in theirhumancapitalthanthey.wouldwish to be, since it maybe moredifficult
fora
bureaucrat
thanfora privatesectoremployeeto holda diversified
of employment
portfolio
or equity
rightsin unrelated
activities(particularly
withinthepublicsector).A privatesectorindividualmay
workat or own unrelated
businessesforthepurposeof reducingthevariancein his income.The
bureaucrat
maynotonlyhaveless reasonto fearanyvariancein hisincome,butwouldfinditdifficult
to be simultaneously
employed
bureausand certainly
byunrelated
impossibleto buyequityrightsin
different
bureaus.Constrained
in seekingmorediversified
sourcesof income,thebureaucrat
may
also, however,
be prevented
frombecomingmorespecialized.The reasonis againthesame: in the
privatesectorindividualsmaybecomehighlyspecializedand sell theirservices(or ownequity)in
manybusinesseswithina narrowrangeof specializedactivity;
a bureaucrat
cannotdo thisbecause
he hasno accesstoownership
rights
andcannotnormally
be employed
bymultiple
bureaus.De Alessi
The onlyclearconclusionfromthislineof reasoning
(1969) emphasizesthislatterargument.
is that
bureaucrats
havea relatively
fixedportfolio
of humancapital,whereasprivatesectorindividuals
may
becomemorediversified
or morespecializedaccording
to theirpreferences.
itmust
Again,however,
be notedthattheargument
sustainedheredependssimplyon theexistenceof specializedresources,
noton anyclaimthattheyare moreprevalent
in thepublicsector.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
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JohnA. C. Conybeare
Bureausmayalso use specializedcapitalfactors.A postalsorting
machine,
forexample,is specializedand mustbe used
telephone
exchange,orjet fighter,
oflabor,andhencemaybe unsalablein theevent
withrelatively
fixedproportions
of outputreductions.11
The use of specializedcapitalmaybe encouragedby
incentives
touse capital-intensive
production,
sincelarge-scale
capitalequipment
is likelyto be morespecialized.The bureaucrat's
desireto maximizecurrent
spendingmaylead to a preference
forproduction
processeswithhighercapital
and loweroperating
costs (Niskanen,1975, p. 639; De Alessi, 1969). If the
bureauconsidersits implicitcost of capitalto be less thana marketrate,the
toprefer
Averch-Johnson
(1962) effect
wouldsuggestan additional
incentive
capital-intensive
techniques.
De Alessi(1960) notedthetendency
forpublicdecisionmakersto use less thanmarket
discountratesin cost-benefit
analysis(i.e., they
willunderestimate
social
of
and
thetrue
cost capital
employexcessively
capital12
intensive
production).
so as, forexample,
However,
bureausmight
prefer
labor-intensive
production
to maximizethe patronagevalue of the budgetor because salariesmaybe a
of numbersof employeessupervised(Downs, 1967; Fiorinaand Noll,
function
1978,p. 26). Labor-intensive
production
mayalso lead to greaterspecialization
of thebureau'shumancapital,as thedivisionof laborbecomesmorecomplex
ofemployees.
betweentheshortwithlargernumbers
Theremaybe someconflict
and the longertermgains
termbudgetary
gain of capital-intensive
production
froma largerstaff.Empiricalestimates
offactorintensity
havebeeninconclusive
(see Borcherding,
1980,pp. 49-54). One studybyOrzechowski
(1977, pp. 253in Virginiato be less capital-intensive
58) foundpublicuniversities
thanprivate
13
institutions.
Wherespecializedresourcesare present,the effectsof shifting
between
In thecase of thebudget
bureauandothermarket
willbe diminished.
structures
constrained
bureauexercising
pricediscrimination
(Figure3), thebureau'soutput
(B, at AC = ARB)reflects
existingindustry
capacity.The cost of carrying
specializedfactors
reducesthecostsavingfroma fallin output;at outputsless than
B, MC and AC shiftdownto MC, and AC,. If the bureauis sold to private
thanM, in thecase of monopoly)
enterprise,
outputwill fallonlyto Ml (rather
orto C, (rather
thanC, in thecase ofa competitive
industry).
Specializedfactors
II Neither
norcompetitive
couldsellofffactors
whichhavetobe usedin fixed
monopoly
industry
sincewhenoutputcontracts
thereis a determinate
ofunusablefactors.
If factors
quantity
proportions,
can be usedin variableproportions,
theycouldnotbe soldin a competitive
market
without
accepting
a declinein themarginal
costsavingscausedbya declinein theequilibrium
priceofthefactor.
12TheAverch-Johnson
effectwas originally
elaboratedin the contextof a regulatedindustry
whichis alloweda rateof return
greaterthanthemarketcost of capital,inducingtheindustry
to
underestimate
thetruecost of capitaland therefore
use excessively
Incapital-intensive
production.
sofaras bureaus(especiallythose"mixedbureaus,"as Niskanencalls them,whichsell theiroutput
to thepublic)are allowedan implicitrateof return
in excessof thecostof capital,thesameeffect
mayoccur.
13Although
inappropriate
factor
intensities
mayincreasefactor
specialization,
theirprimary
effect
maybe in creating
technicalinefficiency
in thebureau'sproduction,
discussedin a latersection.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY,
MONOPOLY,
AND COMPETITION
491
FIGURE 3
SpecializedResourcesin a Price-Discriminating,
Budget-Constrained
Bureau
$IQ
MI
IIMR\
;
MlC
~~~~MRB=ARMAR
Q
B
C1
FIGURE 4
SpecializedResourcesin a Non-Price-Discriminating,
Demand-Constrained
Bureau
$IQ
\MR
\AR
~~~~~MCI,
AC,
9
AC
M-2,ACI2IMC,
MC2,AC2t
M M1 B C1
C
Q
willalso imposea costpenalty
on outputexpansion,as in thecase ofthedemand
constrained
bureaunotexercising
pricediscrimination
(Figure4): themarginal
costofexpansionrises,lowering
thecompetitive
output(C1) towardthebureau's
whilethecostsavingfromcontraction
existing
capacity,
falls,raisingthemonopolyoutput(M1).
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
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JohnA. C. Conybeare
Niskanenmentioned
onlythecase wherespecializedfactorsconfermonopsonypoweron thebureauandloweritscosts(Niskanen,1971,pp. 30-33). This
willproducean additional
costpenaltywhenshifting
frombureauto competitive
industry
raisesoutput,sincemonopsony
poweroverfactors
will be lostin tranloss ofmonopsony
sition.Wherethecompetitive
industry
seekstoreduceoutput,
powermightnotaffect
costs,sincethemarket
eitherwillhavea surplusofthese
factors
(ifused in fixedproportions)
or willbe inducinga declinein therelative
priceofthefactor(ifused in variableproportions).
Public Goods
Thereis a need to integrate
a microeconomic
modelof bureaucracy
with
whatwe knowaboutthesupplyofpublicgoods.14 BishandO'Donoghue(1970)
of moof suboptimal
notedthepossibility
publicgood supplyunderconditions
of
how
thespillover bennopsonydemandarticulation.
Pauly(1970) has shown
efitsbetweenlocal governments
(e.g., in theprovisionof education)will result
in a suboptimalsupply.Hettich(1975) has pointedout thatthe existenceof
towardoverproduction.
publicnessin a bureau'soutputwillreduceanytendency
on partiesbeyondthereachof thesponsor's
Wherebenefits
are conferred
in the sponsor's
revenue-raising
activities,thesebenefitswill notbe reflected
demandforthebureau'soutput.A local bureauproducing,
say,educationand
parklands,will face a sponsordemandcurvewhichis determined
onlyby the
needsof a particular
area and does notreflecttheglobalsocial demandforthe
bureau'soutputfromadjacentareas whichmaybenefitfromtheeducationor
as a publicgood. In thecase ofa nonregional
parkland
bureau,suchas a federal
government
department,
publicgood spillovers
mayalso occur.The demandof
fordefenseor space travel,forexample,maynotreflectsocial
thegovernment
demandforthesegoodswheretherearespinoff
effects
beneficial
to some,butof
no directvalueto thebureau'ssponsor.The undersupply
of thepublicgood in
suchcases does reston thepresumption
thatit is thedemandforthegood itself
whichdetermines
rather
thanreturns
tothefactors
usedin producing
production,
of thepublicgood mightnotbe
thegood. If the latterweretrue,production
in
on thefactorsused intensively
reducedbecauseof pecuniarylosses inflicted
the outputof any
the good, thoughthisis a problemof predicting
producing
on thegeneralassumptions
of the
good, whether
publicor private,and reflects
model(viz., thatbudgetmaximization
dominatesthebureaucrat's
utilityfunction).
If thebureauis actuallyproducing
a purepublicgood,it wouldbe difficult
to comparethebureauoutputwiththatof privateenterprise,
sincemarkets
will
of
failto provideanyofthepublicgoodwheretherearea largenumber
probably
14Publicgoods are distinguished
in consumption
(jointsupply)
by thequalitiesof nonrivalry
of "freeriders"whodo notpayfor
forthepresent
and,moreimportant
discussion,nonexcludability
thegood. Marketswilltendtoundersupply
publicgoodsundermostconjectural
variations,
especially
as thenumber
of beneficiaries
increases.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
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BUREAUCRACY, MONOPOLY, AND COMPETITION
beneficiaries.
Nevertheless,
whatever
bureaucratic
oversupply
existswill be reducedbythepresenceofpublicness.McMillan,Wilson,andArthur
(1981) found
a highdegreeof publicnessformunicipalservicesin smallcommunities,
but
admitted
thatmostempiricalstudiesagreethatmanylocal government
services
(e.g., fire,police,parks,recreation,
garbagecollection)have a low degreeof
publicnessandcouldbe providedbyprivatecontracting.
A privateproducermaybe able to changethenatureor marketing
of the
bureau'sgood in such a way as to chargeusersthefullcost of thegood, an
increasingly
frequent
phenomenon
in recentyears,as taxcutting
has forcedgovernments
to contract
publicservicesto privatefirms.Assumingthatprivateconis feasible,Figure5 showsthecase ofa non-price-discriminating
tracting
bureau,
wherethedegreeof publicnessunderbureauproduction
reducesthesponsor's
demandto AR, lowerthanthetruesocial demandcurveAR,. The outputof the
bureau(B) maybe reducedto less thanthatof a privatemonopoly(M) or a
competitive
industry
(C).
The questionof whygovernments
have assumedfunctions
whichare not
publicgoods, but (in manycases) providedthemvia bureausas if theywere
publicgoods,leadsintotherecently
'5
popular"growthofgovernment"
literature.
Director'slaw,forexample,wouldsuggestthatthesequasi-publicgoods serve
thegoal of redistributing
incometowardthemedianvoter(see Stigler,1970).
Peltzman(1980) foundthepublicgood explanation
ofthegrowth
of government
tobe empirically
andalso favored
unsupported,
an electoralincomeredistribution
theoryof thegrowthof government,
based on a secularrise in theequalityof
FIGURE 5
PublicGood Supplybya Non-Price-Discriminating
Bureau
$IQ
>\
|
B M
~~~~~~~MC,
C
AC
Q
15One of theoriginalexplanations
forthegrowthof government,
knownas "Wagner'slaw,"
arguedthatgovernment
in developedcountries
will growrelativeto theprivatesectoras a resultof
incomeeffects
whichincreasethedemandforpublicgoodsor goodswhicharedistributed
as ifthey
werepublic(e.g., welfareexpenditures).
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
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JohnA. C. Conybeare
incomes.Whatever
theredistributive
goalsofgovernments
maybe, expanding
the
scopeofgovernment
to includegoodswhichhavea lowdegreeofpublicness
may
achievethesegoalswithgreater
reasonforthepublicprovision
accuracy.Another
of nonpublic
goodsmaybe thatweakdemandrelativeto costsand/or
regulatory
restraints
makesomenonpublic
goodsunattractive
to privateenterprise,
particularlyat themunicipallevel.These goods are also likelyto be thosethatdo not
lendthemselves
to technicalinnovation,
so thatlocal governments
maybe burdenedwiththe provisionof low-efficiency,
nonpublicgoods-a problemdiscussedat greater
lengthbelow.
CompetitionbetweenBureaus and Sponsors
Tiebout(1956) arguedthatifcitizens"vote withtheirfeet,"local governmentswill be forcedto act as if theywerein a competitive
industry.
Though
Epple andZelenitz(1981) havequalifiedTiebout'shypothesis
(viz., notall factorsof production
can "vote" by movingaway),competition
mayhavea major
effecton thebudget-maximizing
bureau.Competition,
constraining
whether
actualor potential,16
mayaffectthemodelin twoways:thebureau'ssponsormay
withothersponsorsfortax residents
be competing
(theTiebouteffect)and difforthesamesponsor'sfunds.
bureausmaybe competing
ferent
The counterpart
to thepublicgoodscase is thesituation
wherethesponsor
can excludecategories
of consumers,
so thatthereare no publicgood spillovers
intoothersponsorcatchment
areas, butwheresponsorsare competing
fortax
residents
by offering
betterservicesor lowertaxes.Bureauswill prejudicetheir
sponsor'scompetitive
positionbywastingtaxpayers'
fundsin overproduction
and
willhavean incentive
mixclosertothecompetitive
tooffer
a budget-output
level.
Courant,Gramlich,andRubinfeld
(1979) showedhowtheabilityofbureaucrats
to expandlocal governments
by usingtheirvotingpowerwill be constrained
by
theease withwhichprivatefirmscan exitfromthearea. Theyalso suggestthat
thisrestraint
maynotworkifbureaucrats
miscalculate
theeffects
oftheirbehavior,and offerthefiscalcrisisof New YorkCityin the 1970s as an example!
Another
problem
mayoccurifthesponsorhasmanyclientbureaus,noneofwhich
has anyincentive
to limititsdemandson thesponsorbecauseitsneedsare too
smallrelativeto thetotalresourcesof thesponsor.The financialsurvivalof the
sponsormaythenassumethenatureofan n-Prisoners'
Dilemmaforthebureaus.
Sponsorswithmanybureausmaybe helpedby a secondformof competition,thatis, betweenbureausattempting
to providethesponsorwiththesameor
substitute
products.Allison's(1971) "bureaucratic
politics"modelfocusedon
thisformof competition.
Undersuchconditions
bureausare unlikely
to be able
to remainpricediscriminators
and will be forced,again,to offera competitive
16Following
therecent"contestable
markets"literature
(Baumol,1982), we mayadd thatcompetition
betweensponsors,likefirms,mayneedonlybe potential
(i.e., sponsorsmayonlyactually
competewhereothersponsorsseek to extractsupranornal
rentsfromtheirtax residents),
as longas
thereis freeentry
andcostlessexitfromthemarket
fortaxresidents.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
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MONOPOLY,
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495
budgetandoutput.The sponsormaybenefit
evenifthebureausarenotproducing
substitute
products,but are stillcompeting
forthesponsor'sfunds(McGuire,
Coiner,and Spancake,1979). Unfortunately,
competition
mayalso bringsome
negativeside effects(e.g., highermonitoring
costs forthe sponsor,wasteful
"politicaladvertising"
bybureaus,loss ofeconomiesofscale ifdecreasing
costs
arepossible)(see ThompsonandZumenta,1981;Faith,1980).
Niskanendidnotdeal withthequestionofcompeting
sponsorsbutdid outline a case of bureaucompetition
beforea reviewcommittee
(Niskanen,1971,
butnotreduce
pp. 155-68),concluding
thatcompetition
willincreaseefficiency
His exampleappearsmisleading,
overproduction.
sincehe assumedthatthereas the bureausand simplyattempts
view committee
has the same interest
to
optimizetheirjointgainssubjectto thesponsor'scost constraint.
Naturally,
he
foundthejointoutputto be the same as fora singlebureau.In a laternote
his previousconclusionthatcompetition
will stimulate
Niskanen(1979) restated
efficiency,
thoughagain,he does notappearto believethatit will reduceoversupply.
of competition
havenotbeen welltested,Niskanenhas
Thoughtheeffects
effect
ofreducing
comhimself
someevidenceforthebudget-expanding
provided
bureaus(Niskanen,1975,pp. 640-43). Deacon (1979) propetition
bymerging
of competition,
videdsomeevidenceof thebeneficialeffects
showingthatlocal
in Los Angeleswhichpurchasedservicesfromoutsidetheirown
governments
hadlowerbudgetsthanthosewhichproducedtheservices
administrative
structure
their
own
bureaus.
As Deacon noted,givenhis resultthatelasticities
with
were
lessthanone(i.e., outputs
wereinexcessofthebudget-maximizing
level),falling
budgetscouldbe accompanied
by eithera fallin output(if theeffectof competitionis toreducethebureau'sbargaining
thesponsor'sdemand)
power,lowering
or a risein output(if competition
reducescosts). Welfaregainsare possiblein
bothcases.17 Moststudiesofcompetition
effect
emphasizetheclearlybeneficial
of reducingcostswhenbureausare forcedto competewithprivateenterprise,
presumably
losingmuchof theirprice-discriminating
capabilitiesand setting
priceandoutput
nearertothatofa competitive
oligopolist.
CavesandChristenson
noted
this
on
effect theCanadianNationalRailroad,whenit was forced
(1980)
to competewiththeprivateCanadianPacificRailroad.The possibility
remains,
thatbureausandprivate
however,
producers
maysimplycolludetomaintain
price
discrimination
and otheranti-competitive
deviceswhichcause welfarelosses.
Davies (1977), forexample,foundthatcompetition
betweenAustralia'sgovernment-owned
TransAustraliaAirlinesand the privateAnsettAirlineshas not
eliminated
differences
betweenthetwo.
efficiency
17In Niskanen's
standard
modelcompetition
mayreducethebureau'spricediscriminating
power,
shifting
averagerevenue(ARB in Figure1) downward
andreducing
bureauoutputtowardthecompetitivelevel.If competition
causescoststo fall,welfare
gainsarepossibleifoutputdoes notrisebythe
fullamountpermitted
bythecostreduction.
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
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JohnA. C. Conybeare
Bureau Productivity
The abovediscussionsuggestsanothercontingency
relevant
to Niskanen's
results.Lack ofcompetition
is a majorcause oftechnicalinefficiency
in production,and thereappearsto be muchevidencethatpublicbureausare less technically efficientthan private firms (see Borcherding,1980, pp. 34-45;
Orzechowski,1977, pp. 248-53; Savas, 1977; Stevens,1978; Frech, 1976).
Thoughthesefindingsare clearlycontrary
to thetraditional
of
indentification
bureaucracy
withrationality
and efficiency,
Niskanen'soriginalmodeldid not
deal withthisproblem;thebureauoverproduces,
he said, but notnecessarily
inefficiently.
BretonandWintrobe
(1975, p. 202) arguedthatinefficiency
should
be moreprevalent
is harderfor
thansupraoptimal
sinceinefficiency
production,
sponsorsto detect.Niskanen'slaterwork(1975, pp. 635-38) acknowledged
that
overproduction
and inefficiency
couldbe substitutes.
Millerand Moe (1983, p.
297) suggestedthatevidenceforbureaucratic
inefficiency
supportsNiskanen's
offsetsanytendency
to
model,thoughit will be shownbelowthatinefficiency
overproduction.
thepecuniary
ofthebureau.Theymaychooseto seek
directly
appropriate
profit
rentsthrough
whatLeibenstein(1966) has called "X-inefficiency,"
or higher
bureaucostsderiving
fromsuchprivatebenefits
as fewerworking
hours,under18 Williamson
andperquisites
of office.
employment,
thatinef(1964) suggested
ficiencywill arise as a resultof excessivelylabor-intensive
which
production,
raises managers'salaries,security,and power.Migue and Belanger(1974)
showedhowinefficiency
maybe a deliberate
attempt
bythebureauto maximize
ordiscretionary
thatpartofitsbudgetnotusedproducing
theoutput(i.e., profits
budget,as theycall it). Producing
at B1 whereMC = MRB,theprice-discriminatingbureauin Figure6 willmaximizeitsprofits
(p = BI(MCI - MC)), which
it can retainonlybytransforming
theseprofits
intohighercosts(MCI) accruing
tobureaucrats
as privaterents.In theabsenceofinefficiency,
theseprofits
would
appearas a budgetsurplusandmostlikelybe claimedbythesponsor.
In general,lowproductivity
ortechnical
inefficiency
raisesthebureau'scost
curves,reducingthe outputof the budget-constrained
bureauand thatof the
demand-constrained
bureauif costs rise enoughto transform
it intoa budgetconstrained
bureau.If thebureau'soutputhadbeenabovethecompetitive
level,
willreducethisdifference.
inefficiency
FiorinaandNoll(1978) havealso derived
thisoutput-reducing
effect,
assumingthatinefficiency
arisesfromtheinput-maximizingproclivities
of bureaucrats
(e.g., excessivelylarge staffs).Finally,it
shouldbe notedthattheremaystillbe welfaregainsfroma competitive
market,
evenwherethetwo outputsdo notdiffer.
In thecase of thebureaushownin
Figure6, thebureau'soutputis reducedto thecompetitive
level(B1 = C), but
18The existenceofX-inefficiency
Stigler(who argues
has been questionedby some,including
outputmix) and severalof the "principalfora different
is merelya preference
thatX-inefficiency
will constrainmanagerial
competition
agent" theorywriterswho believethatintra-organizational
(see DiLorenzo,1981).
inefficiency
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
BUREAUCRACY,
MONOPOLY,
497
AND COMPETITION
FIGURE 6
in a Price-Discriminating,
Low Productivity
Budget-Constrained
Bureau
$IQ
p
MCI, AC,
MC, AC
MRM I
C =B
MRB =ARM
B
AR
Q
fromcompetition
theremaybe a welfarebenefit
equal to rectangle
p, depending
on whether
costcurveMC, is considered
a truecostor merelya contrived
transfer.19
Inefficiency
mayhaveevenmoresevereconsequencesat themacrolevel.
Baumol(1967) showedhow,in an economywithpublicsectorproductivity
dein theprivatesectorand thegovernment
conclining,if wages are determined
strainsanyrelativedeclinein bureauoutput,costswill risewithout
limitin the
in theprivatesectorwilltendto zero,andthe
government
sector,laboremployed
a decliningrateof growth.Thoughinefficiency
economyas a wholewill suffer
mayreducebureauoutputin Niskanen'sstaticmodel,it mayprovidea basis for
theseculargrowth
ofgovernment.
Spann(1977) foundBaumol'smodelconsistent
withempirical
evidence.
Conclusion
Niskanen'sfamousgeneralization,
thatbureauswillalwaysoversupply
their
output,has been shownto be limitedto thecase of a bureauable to exercise
in its relationship
withits financialsponsor.The
perfectpricediscrimination
of
such
a
an
assumption
capability
imputes implausible
degreeofmonopoly
power
19Rectangle
p is a welfare
loss associatedwithbureaucracy
ifwe consider
thedifference
between
MC and MC, to reflecta "real" cost increaseor inefficiency
in production
ratherthanmerelya
dishonest
statement
of costsforthepurposeof maximizing
thebureau'sdiscretionary
income.If the
bureau's"real" costsare stillMC, thereis no welfaregainfromprivatization.
However,
following
Posner(1975), we maystillwishto considerrectangle
p a welfareloss becausethesewindfallgains
are likelyto be wastedin theuse of resourcesto maintainthebureau'sprivilegedposition(e.g.,
lobbying
thesponsor).
Analisi delle politiche pubbliche e della protezione sociale a.a. 2016-2017
498
JohnA. C. Conybeare
to thebureau.Wherethebureauactsas a non-price-discriminating
budgetmaximizer,outputmaybe equal to orless thanthatofa competitive
industry.
Restoring a reasonabledegreeof bilateralmonopolyto theproblemproducesresults
withtheempiricalevidencethatbureausproducegreater-thanmoreconsistent
budget-maximizing
outputs.
in thepapershowthatsomeof thecharacThe othervariations
introduced
teristics
oftenassociatedwithgovernment
production
makethecomparisonof
to predict.Table 1 summarizes
the
publicand privateoutputevenmoredifficult
froma bureauto a competitive
ofchanging
market.
Whenrelative
outputeffects
willreducethedifference
everB > C, anyofthecontingencies
betweenthetwo
outputs.WhereB < C, twoofthecontingencies
(publicgoodsand low productivity)will widenthe same difference
and theothertwo will reduceit. These
modelare of morethanmereintellectual
extensions
to thebudgetmaximization
interest,
since thereis a widespreadbeliefthatsellingoffbureausto private
willproducelargewelfareor allocativeefficiency
enterprise
gains.
be extended
toincorporate
Themicroeconomic
approachcandoubtless
many
on thebureaucracy
otherconjectural
variations
theme.It may,forexample,be
of Downs's lifeframework
reintroduced
intothemoredynamic,longitudinal
of theriseand declineof bureaus,so we mayunderstand
how
cyclehypothesis
structures
thebehaviorof a bureaurelativeto othermarket
maychangeoverthe
if bureaushaveadverse
lifeof thebureau.This shouldbe especiallyimportant
macroeconomic
consequencesof thekinddiscussedby Baumol (1967). More
intothebureaumodelthe
workalso needsto be done on thetaskof bringing
behavior
ofothergovernmental
institutions,
suchas legislatures
(see, forexample,
MillerandMoe, 1983).
of staticmarket
also be awareof thelimitations
strucWe should,however,
is thecaveatthatwe are here
turemodelsof bureaubehavior.Most important
market.Furthermore,
otherdifthebureauwithan ideal competitive
comparing
ferences
structure
characteristics
mayremainevenwheresomemarket
converge.
Rainey,Backoff,andLevine(1976) pointoutin theirsurveya number
of differstructure
encesotherthanmarket
(suchas theroleofcoercionandthecomplexity
of objectives)whichmightbe expectedto persistin the absenceof outputor
modelrefers.An explicawelfaredifferences
to whichthebudgetmaximization
tionof theconsequencesof otherbureaucharacteristics
mightbe mostfruitfully
in themodelto otherbodies
someoftheclearconnections
pursuedbyfollowing
ofliterature
bureaucratic
(e.g., organizational
design,principal-agent
bargaining,
politics)whichanalyzedifferent
typesofcausal variables.
25 October1981
submitted
Manuscript
Final manuscript
received27 October1983
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