Limits to public intervention: government failures - Problems inherent in bureaucratic supply
3 important questions on Limits to public intervention: government failures - Problems inherent in bureaucratic supply
We expect to observe production organized by hierarchical firms rather than by collections of independent entrepreneurs, as contracting involves costs. The principal-agent problem arises because employers and employees do not have exactly the same interests and because it is costly for employers to monitor the behavior of their employees. The sum of the costs of the undesirable behavior of agents and of the activity to control it, is referred to as:
Agency loss
Public executives generally operate in environments characterized by great asymmetry of information, not just with respect to the general public but with respect to other representatives as well. We can see the implications of the asymmetry in information by introducing the concept of the discretionary budget:
The difference between the budget that the agency receives from its sponsor and the minimum cost of producing the output level that will satisfy its sponsor.
The separation of most government employees from partisan politics in public agencies provide continuity in expertise when ruling parties change, as well as insulation against attempts to use agencies for partisan purposes. However, this must be purchased at the expense of:
- The same rules that make it difficult to fire employees for political purposes make it difficult to weed out the incompetent and unproductive.
- A civil service system that makes it difficult to fire employees must also take great care in hiring them if quality is to be maintained. However, the system is slow and complicated.
- Bureaucracies are unresponsive. Consumers usually cannot show their displeasure by selecting another supplier.
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