Property rights in the public sector

As with theories of the firm, many theories of public sector organiza- tions have been based on property rights, either explicitly or implicitly. These theories tend to examine the concept of authority rather than ownership. Although authority and ownership are not the same, they are related. Whereas ownership implies a legal right of possession, authority refers to the ability to make and enforce decisions, that is, the ability to control. Possession and control are components of a full right of ownership. Thus authority, while carrying no legal property right, corresponds to the concept of economic property rights as defined by Barzel (1997). In the research on public sector organizations, the focus on the relationships among authority, control, and hierarchy is con- cerned with the way resources are used, the returns or benefits from the use of resources, and to whom those returns accrue. This is analogous to the property rights theory of the firm, and provides a foundation for a property rights theory of the bureau.

In the most general sense we can think of taxpayers or the public as the owners of public sector organizations. Citizens are like shareholders, with the important differences that the shares are not tradable, and that each citizen has an equal share in any public sector organization. That is, ‘shares’ are based on citizenship rather than granted in proportion to the amount of taxes paid. I examine this idea of shareholder-citizens further below.

For public sector provision of services, the ultimate authority is granted to government operation through bureaus by the voting public. Public ownership is thus most widely dispersed at the national (or in the US, federal) level, which is the focus of this chapter. The cost of exchanging one’s shares is prohibitively high, entailing change of citi- zenship with no pecuniary compensation.

Even though the voting public is the ultimate authority, in a represen- tative government this authority is articulated through elected officials, or legislators. Legislators represent the taxpaying public through their decisions on what services will be provided and on how much of those services shall be provided through budget appropriations that allocate funds for projects and programs of each bureau.

In the role of deciding bureau appropriations, legislators are more analogous than citizens to corporate shareholders in a number of ways. Like shareholders, legislators invest funds in different public organiza- tions. Like shareholders, legislators expect a return on their investment. Here the return may be nonpecuniary, that is political, such as votes, or it may be pecuniary, such as campaign contributions. And like share- holders, legislators may withdraw funds by withholding them from specific projects and by reducing future budgets.

Legislators differ from corporate shareholders in a number of impor- tant ways, however. First, unlike shareholders, legislators do not obtain ‘shares’ in a bureau in the sense of corporate stock, that is, a percent of asset ownership. Rather, legislators are more in the position of ‘stake holders’ in a bureau. That is, a legislator has a ‘stake’ in a bureau: the bureau’s services are an important component of the political success of the legislator. A legislator as stakeholder chooses to invest in a bureau by appropriating funds for that bureau’s services.

Second, legislators, when making bureau investment decisions, are appropriating other people’s money, that is public funds. These invest- ment decisions do not involve appropriating their own personal funds (except, of course, for the fraction of public funds that is their own tax contribution). This situation implies that legislators do not bear the full pecuniary cost of their investment decisions. To the extent that legisla- tors are more concerned with the political return rather than the pecu- niary return from appropriations decisions, their investment choices would rationally be consistent with the preferences of their constituents whose funds they commit.

Third, unlike corporate shares, stakes (that is, budget funds) are not tradable rights; they cannot be sold directly for compensation. Although a legislator’s stakes literally may not be bought and sold in the public sector, there is a political market for such stakes. The political market is observed through the logrolling process where legislators’ votes for appropriations for alternative bureau  programs  and  projects are traded among the different legislators. Thus, legislators’ stakes in a bureau may be indirectly traded for some political return. If by moving appropriation funds from one bureau to another through either budget vote trading or individual decision political returns may be  increased, then legislators’ investment decisions will change accordingly. Thus even though their political stakes in a bureau are not the same as corporate shares that can be traded in capital markets, legislators as stakeholders exhibit similar behavior to corporate shareholders. Legislators will move funds toward those programs and bureaus that are expected to yield the greatest political return. Legislative authority over appropriation fund- ing puts legislators as stakeholders in a position of political ownership. The political property rights system in the public sector is one where legislators are rewarded by contributions and votes when policies and programs that they support with appropriations provide benefits to interest groups (contributors) and constituents (voters). The rights sys- tem thus creates incentives for legislators to promote these policies and programs by funding them. While program benefits accrue to specific interest groups or voters and political benefits accrue to legislators, the costs of these programs and policies are spread across a much larger group of citizen-taxpayers. Most of those bearing the cost reside outside the constituency of the legislator (Weingast, Shepsle, and Johnsen, 1981). For utility maximizing legislators, therefore, the political property rights system creates an incentive for legislators to assign a much greater weight to benefits of any legislative appropriation investment relative to program costs (Carroll, 1993a). On the investment side, then, the pub- lic sector property rights system promotes overinvestment in preferred policies and programs by each legislator. In addition, the interest in promoting one’s preferred programs or projects encourages legislators to offer votes in favor of other, less preferred programs or projects, or even those that may be undesirable. They do this in exchange for votes by other legislators for their own preferred programs to ensure their suc- cessful passage by the legislature. This is a political compromise strategy that favors additional output generated by the public sector. The rights system provides little if any incentive to reduce costs relative to benefits, that is, to be economically efficient in the supply of public services.2

Bureau managers also have their own interests. As a career bureaucrat or public servant, a bureau manager obtains no direct reward from vot- ers or interest groups who are politically motivated. For Civil Service employees, income is based on grade and tenure in position. Managerial income is therefore determined independently of the bureau’s produc- tion activities, although it is not independent of the manager’s position in time and service. For a utility maximizing bureau manager, then, ben- efits such as prestige, position and tenure, and therefore also income, are assigned greater weight than is bureau efficiency. Prestige and relative position and grade are likely to be greater with a larger organization, with a correspondingly larger staff and budget. The property rights sys- tem in the public sector implies that cost reducing strategies may have the effect of reducing a bureau’s budget and possibly also staff size in the long run. This would occur as legislators observe that the same level of services of a cost reducing bureau now can be obtained with a smaller appropriations investment. The expected legislative response would be to provide fewer funds to the efficient bureau and reallocate the saved appropriation to a different bureau so that this different (and less efficient) bureau may expand services to generate additional political rewards. The implication is that the property rights system in the public sector encourages legislative decisions that provide additional investment to less efficient bureau programs and projects. An addi- tional implication is that the public sector rights system provides little incentive to a bureau manager to be economically efficient either by reducing its level of services provided or by reducing cost (via staff cuts, for example).

Source: Carroll Kathleen A. (2004), Property Rights and Managerial Decisions in For-Profit, Nonprofit, and Public Organizations: Comparative Theory and Policy, Palgrave Macmillan; 2004th edition.

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