22. The Peculiar Economics of Bureaucracy

Abstract

A SIMPLE MODEL IS PRESENTED OF THE MAXIMIZING BUREAUCRAT AND, BASED ON THIS MODEL, A SET OF TENTATIVE QUALITATIVE ANSWERS TO SEVERAL QUESTIONS CONCERNING THE CONSEQUENCES OF BUREAUCRATICALLY PRODUCED GOODS AND SERVICES. THE MODEL IS BASED ON THE FOLLOWING TWO CRITICAL ASSUMPTIONS: (1) BUREAUCRATS MAXIMIZE THE TOTAL BUDGET OF THEIR BUREAU; (2) BUREAUS EXCHANGE A SPECIFIC OUTPUT FOR A SPECIFIC BUDGET. THE LATTER CHARACTERISTIC GIVES THE BUREAU THE SAME TYPE OF MARKET POWER AS A MONOPOLY. IT IS SHOWN THAT THIS MODEL IMPLIES THAT THE BUREAU WILL PRODUCE A GREATER QUANTITY THAN THE PARETO-OPTIMAL LEVEL. THE EQUILIBRIUM CONDITIONS FOR A BUREAU ARE COMPARED WITH ALTERNATE FORMS OF ECONOMIC ORGANIZATION. IT IS CONCLUDED THAT THE BUREAU WILL PRODUCE A HIGHER LEVEL OF FACTOR SURPLUS THAN EITHER THE MONOPOLY OR COMPETITIVE ORGANIZATION, UNLESS THE BUREAU IS ALSO A MONOPSONIST. HOWEVER, IN THIS MODEL, THE BUREAU WILL CREATE NO CONSUMER SURPLUS. THE EFFECTS OF CHANGES IN DEMAND AND COST CONDITIONS ARE EXAMINED. SOME PRELIMINARY TESTS OF THE MODEL, ANALYTICAL EXTENSIONS, AND POLICY IMPLICATIONS ARE ALSO DISCUSSED. /BPR/