Variations in public sector bureaus

The discussion of Chapter 6 focused on property rights and decision making in public sector bureaus in the US federal sector. Here I address variations in these organizations first, within the US federal govern- ment and second, across the different levels of US government.

Within the  US  federal  government,  public  organizations  provide a variety of services, some more tangible and thus measurable than others. Some bureaus provide administrative services for other federal agencies within a specific department. Examples of these are the Office of Inspector General in the Department of the Interior, and the Admin- istrative Office of the US Courts in the Department of Justice. Other bureaus provide administrative services for the federal government as a whole. This is the nature of the services provided by the Office of Personnel Management and the General Services Administration. The primary service of some bureaus is to provide and administer funds for private organizations and individuals. These include guarantees (to financial institutions for insurance or loans or grants (such as for low income housing development from the Department of Housing and Urban Development, and education and research from the National Science Foundation). The primary service for other bureaus is to develop and enforce regulations or policy. For example, the Consumer Product Safety Commission, the Environmental Protection Agency, and the Securities and Exchange Commission are regulatory agencies that artic- ulate government policies through specific regulations. Some bureaus provide specific tangible services. For example, Veterans Administration facilities provide specific health care services to US military veterans, US Geological Survey provides mapping services, and the Census Bureau provides data collection services, analysis and reports.

The foregoing indicates the variety of services and the variation in the measurability of the output of public sector bureaus. The variation in measurability of output has clear implications for monitoring by own- ers and investors, that is, taxpayers and legislators. As noted in Chapter 6, Lindsay (1976) captured the significance of this variation in this the- ory that proposed that in bureaus which offer such variation in services, bureau managers will expand those services that are measurable relative to those that are less so. For bureaus that only supply intangible services such as administrative services, regulations, or policy, this theory implies that relatively little monitoring of these bureaus will take place by either taxpayers or legislators because it is too costly. For example, although it is possible to observe the publication of a specific regulation or policy, these services involve a process of development to create the form that is ultimately published. It is this entire process that is part of the output that renders the service more intangible and difficult to measure.2

These same variations exist across levels of governments. The more local is the level of government, the larger is the proportion of services that are more measurable. These include water and sewer services, garbage removal services, police and fire safety services, street lighting, etc. Monitoring costs fall for this reason, as well as that the services are simply more localized and thus less costly to observe.

In the US there is another important variation that exists across levels of government. While the federal government may run a deficit, state and local governments may not. Bureau managers are therefore more constrained at the state and local levels than are those at the federal level.

One implication of the lower monitoring costs and the greater finan- cial constraints facing state and local government bureau managers suggests that there is less separation of ownership and control at these levels. Increases in state and local programs increase potential political benefits. Increases in taxes to finance these programs are politically costly, however. In a number of US state governments an increasingly common response to their financial constraints has been to turn to nontraditional forms of generating revenue as an alternative to increas- ing taxes. These nontraditional forms of generating revenue include lotteries and slot machines or casinos.

These sources of revenues may have the effect of increasing the sepa- ration of ownership and control for two reasons. Together these reflect the dual level of principal–agent relationship that exists in the public sector. One reason concerns the principal–agent relationship between citizens and the legislators who represent them. These revenue generat- ing systems are created through legislation and may not be subject to a process of direct constituent approval, such as voting by referendum. These alternative sources of revenue may be proposed as temporary measures but tend to become permanent. In addition, as with any pol- icy there are distributional effects. These alternative sources of revenue generate gains for some groups, such as private investors, (who in turn generate political benefits to the legislators such as through increased campaign contributions) without generating a net increase in revenues for long term constituent benefits (Carpenter, 2003).

A second reason that separation of ownership and control may be increased through the use of these nontraditional sources of revenue is that the authority for administering these programs and allocating the funds that they generate is often granted to an organization outside of the government that has created the revenue system. These alternative organizational forms are referred to as quasi non-governmental organi- zations, or QUANGOs. The systems of accountability and monitoring of QUANGOS are less direct than they are for government bureaus (Jackson, 1983). The effect of the use of alternative sources of revenue by state governments is therefore to increase the discretionary ability of the manager in decisions that allocate public funds.

In general, the property rights framework based on legislative funding (that is, funding decisions made by elected officials at any level) pre- sented in Chapter 6 holds for all types of public sector organizations at each level of government. The variations in organizations noted here indicate differences in the degree to which bureau managers have econo- mic property rights that allow for expropriation of residual rights from either taxpayers or from their representatives.

In addition, as the level of government becomes more local, the ability of representatives to obtain pure political benefits that may not be in the interest of constituents would be predicted to decrease. Thus, con- stituent and representative interests may be more aligned at the state or local level of government than at the federal level when government activities are financed by taxes. This serves to reduce the economic property rights of the bureau manager at the local level relative to the federal bureau manager. Output of a local government bureau would therefore be closer to the level that maximizes owner (citizen and rep- resentative) interests than would occur at the federal level, and would be supplied at a cost closer to the minimum level.

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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