Sub-optimal economic outputs are those which do
not satisfy the Pareto efficiency criteria; i.e. it is still possible to make
someone better off without making anyone worse off by altering the combination
of inputs that produce such outputs. Government bureaus, in particular, tend to
produce sub-optimal outputs. There are several possible reasons for this. One
is the incentives pushing bureaucrats to make sub-optimal choices. Another, is
that the funding agency always has trouble measuring and monitoring the output
of the bureau.
While the managers of private enterprises are
rewarded based on the profits they contribute to the company, the managers of
public enterprises (i.e. the bureaucrats) are not. This primarily happens
because public enterprises (i.e. the bureaus) are not driven by profit, instead
their job is to supply various goods and services below the price that they
would fetch if provided by private enterprises; which, in turn, happens because
the government believes that if the provision of these goods was the left to
the private market, many people would consume less of these goods, than they should
(Stiglitz,
1988). So either way, the bureaucrat is not driven by
the need to maximize the profits of his/her firm; which leaves open the
question of what, if anything, drives the bureaucrat in his/her work.
A relatively widespread and influential, though
far from unchallenged (Blais and Dion, 1991), assumption, is that an ever
larger size of the bureau or its budget is what every bureaucrat seeks to achieve;
because it is very reasonable to believe that a bureau’s size and budget are
positively correlated with its manager’s salary, power, public reputation,
patronage, etc.; the rewards which everyone can be expected to strive for
(Niskanen, 1971).
But correlation does not imply causation; and
according to Lindsay (1976), there is no reason to believe that an enlarged
bureau or its budget will lead to a greater compensation for its manager. In
fact, according to him, the whole idea is absurd as it implies that public
managers are compensated based on the size of the inputs into their bureaus
only. And no responsible elected official would agree to compensate a
bureaucrat according to such a scheme. In fact, a bureaucrat who is compensated
according to such a scheme would not feel any incentive to produce any output
at all. While in reality, all enterprises, whether public or private, are
evaluated based on the output they produce (Lindsay, 1976).
The output of all companies, whether private or
public, can be expected to be monitored in some way by their owners or funding
agencies, as everyone wants to see valuable results from their contributions to
the company. Owners of private enterprises assess the outputs of their
companies by monitoring profits. Moreover, the value of output of private firms
is strongly monitored by the firm’s customers. If the value to the customers is
low, the firm’s profits drop (Lindsay, 1976). On the other hand, the agencies
that fund bureaus can neither rely on bureaus’ profits nor on bureaus’
customers to monitor the value of their outputs, as the bureaus are not in the
business of making money (and hence have no profits to speak of); and they are
not allowed to charge maximum possible prices for their outputs. Consequently, the
funding agencies are forced to completely rely on personal monitoring of
bureaus’ internal resource use and the quality of outputs (Lindsay, 1976). This
monitoring, however, is costly and difficult as bureaus are too large and
complex to be known inside out by anyone working outside of them. Moreover,
monitoring the quality of outputs, without real input from the consumers of
these outputs, is no less difficult as only the measurable aspects of the
output can be monitored. So, all other, non-measurable qualities of the output,
which can, as a matter of fact, be crucial to customer satisfaction, go
unmonitored. This, in turn, pushes the bureaus’ managers to divert resources
from unmeasurable aspects of the output to measurable aspects (Lindsay, 1976).
This theory can be tested, for example, by
comparing measurable (and hence available) characteristics of Veterans
Administration hospitals and private US hospitals. Producing such unmeasurable
attributes of the output, as the frequency of visits to the wards by hospital
staff or the number smiles and words of encouragement they deliver during each
visit (hence taking more time with each patient), will obviously require a
higher staff-to-patient ratio (Lindsay, 1976). Since according to the theory,
the governmental agency that funds VA hospitals cannot be expected to fund any
unmeasurable attributes of the output, the VA hospitals can certainly be
expected to neglect those just mentioned. On the other hand, private hospitals
will not neglect producing such unmeasurable attributes of the output because
they are clearly important for customer (patient) satisfaction. Consequently,
VA hospitals can be expected to have a lower staff-to-patient ratio than
private hospitals. And this prediction is well supported by the available data
(Lindsay, 1976).
References
Blais, A.,
and Dion, S. (Eds.) (1991a). The
Budget-Maximizing Bureaucrat: Appraisal and Evidence. Pittsburgh, Pa.:
University of Pittsburgh Press.
Lindsay, C.
1976. A theory of government enterprise. Journal
of Political Economy 84 (5), 1061-1078.
Niskanen, W. (1971). Bureaucracy
and Representative Government. Chicago: Aldine Atherton.
Stiglitz, J. E. (1988). Economics
of the Public Sector. 2nd ed. New York: Norton.
