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The Limits Of Bureaucratic Efficiency Essay

1228 words - 5 pages

Canice Prendergast
University of Chicago and National Bureau of Economic Research
Bureaucracies tend to be used when consumers cannot be trusted to
choose outcomes efficiently. But a primary means of bureaucratic oversight
is consumer complaints. But this can give bureaucrats an incentive
to inefficiently accede to consumer demands to avoid a complaint.
I show that when this incentive is important, bureaucracies (efficiently)
respond by (i) ignoring legitimate consumer complaints, (ii)
monitoring more in situations in which it is not needed, (iii) delaying
decision making “too long,” and (iv) biasing oversight against consumers.
I also show that bureaucracies are used only when ...view middle of the document...

I show two related results in this
paper. First, when consumers cannot be trusted to allocate goods efficiently,
bureaucracies are necessarily inefficient. Second, bureaucrats
are used only when consumers cannot be trusted to efficiently allocate
goods. The key insight of the paper then is that efficient bureaucracies
are never observed because the features that lead to their use also make
them inefficient. Put another way, when bureaucracies work well, consumer
choice works better; but when bureaucracies work poorly, consumer
choice works worse.
It is hard to find much good that is said about bureaucracies, both
private and public. The Internal Revenue Service (IRS) and Immigration
and Naturalization Service (INS) are regularly vilified in the press, and
the practices of health insurance companies’ bureaucracies and police
officers fare little better. This is reflected in the pejorative terms for
bureaucrats (bean counters, pen pushers, and so on) that pervade such
descriptions. The typical perception of a bureaucracy has some of the
following features. Standards of consumer service are low. They are
largely unresponsive to customer complaints. Their decisions are rarely
overturned. They are predisposed to turning down consumer requests.
They take forever to come to decisions. Finally, they appear to be governed
by rules (perhaps the defining characteristic of a bureaucracy)
rather than use their discretion in the appropriate way. This paper offers
a model of bureaucracies that yields these outcomes as the optimal
resolution of agency problems. Perhaps most important, bureaucrats
are used only when they exhibit these “inefficiencies.”
I define a bureaucrat as someone who has control over an (observed)
allocation to a customer; control derives from private information that
she holds over its optimal use. I argue that agency problems from bureaucracy
arise for two reasons. First, the decisions made by bureaucrats
involve ex post rents to consumers. (For example, it should matter to
a patient that he be approved for a medical procedure, to an applicant
that he be given a green card, or to a suspect that he not be arrested.)
Of course, many goods allocated by other mechanisms involve ex post
rents for consumers: this is what we call consumer surplus. The second
characteristic that leads to bureaucratic problems is that although consumers
are interested parties, they cannot be trusted to allocate the
benefits. To give a ridiculous (but relevant) example, it is the rare suspect
who would arrest himself if given a choice between that and setting
himself free.
But consumers continue to play a role through overseeing the performance
of bureaucrats. Bureaucrats are rarely offered pay for performance
based on easily available outcome measures. Nor are they
offered rewards based only on the allocations they propose. For instance,
bureaucratic efficiency 931
police officers are not rewarded when they arrest...

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