Is inter-bureau competition the only solution to bureaucratic failure?

Inter-bureau competition is clearly not the only solution to bureaucratic failure, but it is definitely one of a number of possible solutions; and it works in several ways. First, competition among bureaus will lead to the demand, for the services of each bureau, dropping and the elasticity of this demand increasing; leading to a reduction in each bureau’s budget. But since each bureau seeks to maximize its budget, it will start seeking out and using more efficient production processes (Niskanen, 1971, p. 198). Second, since each bureau will have to propose its own budget-output combination, the review committee will be able to choose the most efficient budget-output proposal from among several. And third, competition among bureaus is likely to lead to the use of a larger variety of production processes, which is important for preventing a failure in service production, because it was relying on a few faulty processes (Niskanen, 1971, p. 198).

Another effective way for reducing bureaucratic failure, involves changing the incentives of bureaucrats. One such approach would be specifically aimed at reducing the bureau’s costs of supplying an approved level of output. This would be done by compensating senior bureaucrats with a previously fixed portion of the difference between the bureau’s approved budget and the costs of supplying the output (Niskanen, 1971, p. 201-202). Consequently, bureaucrats will be motivated to reduce the costs of the required output; since the lower these costs will be, the more the bureaucrats will earn.

Another approach to reducing bureaucratic failure through changes in incentives to bureaucrats, involves considering senior bureaucrats for large monetary prizes, some years after they have left office. The awarding of these prizes would be based on the extent to which the nominated bureaucrats managed, while in office, to have their agencies supply the required level of output and the amount of funds their agencies managed to return during this period; in other words, prizes for high levels of efficiency (Niskanen, 1971, p. 204). Such an approach, while likely being less motivating than the one described before it, will have one peculiar advantage over it. In particular, objectively evaluating the level and quality of bureau’s current output as well as the level of deterioration of its current capital assets is far easier to do in the future than in the present (Niskanen, 1971, p. 204).

Yet another approach for changing bureaucratic incentives for the sake of reducing bureaucratic failure, would be very much like the one that was described first, except that the senior bureaucrat will not pocket a fixed portion of the difference between the bureau’s approved budget and the costs of supplying the required output, but instead will be allowed to spend it on a limited set of activities that can contribute to the bureau’s morale, long-term viability, and amenities (Niskanen, 1971, p. 206).

Of course bureaucratic failure that exists in the public provision of many goods and services can also be reduced or even completely eliminated by stopping the public provision of such goods and letting the private market fill the void; or by having the funding agencies contract out all the work normally performed by bureaus to private companies. Both of these approaches are known to be very effective in eliminating all kinds of inefficiencies, as the private providers are always motivated to reduce the costs of production while striving to achieve the highest possible quality for the products (Niskanen, 1971). Certain publicly provided goods and services, however, will not be provided by the private market, without any governmental input, because they are nonrival and nonexcludable (Stiglitz, 1988). A good example of such a good is national defense; which, moreover, should never be completely contracted out to private companies; because such a move will be highly dangerous for national security, making the whole enterprise look rather absurd.

References

Niskanen, W. (1971). Bureaucracy and Representative Government. Chicago: Aldine Atherton.

Stiglitz, J. E. (1988). Economics of the Public Sector. 2^nd ed. New York: Norton.