Why Bureaucrats don't Maximize their Budgets
William Niskanen, in a book published many years ago, proposed a simple model of government bureaucracy. The more money a bureaucrat controls, the more important he is, so bureaucrats want to maximize their budgets. The bureaucracy knows, and the legislature does not know, what a government bureau can do at what cost. The legislature knows how much any level of output from a bureau is worth to it. So the rational bureau misrepresents its production function in a way designed to trick the legislature into giving it the largest possible budget. It does so by finding the largest level of output that it can produce at a cost just barely below the value of that level of output to the legislature and then exaggerating the cost of any lower level of output by enough to make it higher than its value.
When I first read the argument it struck me that it contained a fundamental mistake. So far as I can remember, I never published that conclusion. I recently came across a version of Niskanen's argument in an online discussion, so thought I might as well take the opportunity to explain why it is wrong.
Consider two bureaucrats. Abe has a ten million dollar budget and is required to purchase $9,900,000 worth of paper to be sent to the IRS for printing tax forms on, leaving him $100,000 for himself, his secretary, and rent for his office. Bernie has a one million dollar budget and is required to do nothing at all. Which would you rather be?
Generalizing the example, I suggest that the size of the budget in Niskanen's model ought to be replaced with the surplus, defined as the difference between the size of the budget and the lowest cost at which the output the bureau has agreed to can be produced. That difference represents resources that bureaucrats can divert to their own purposes.
I'm curious. Niskanen's book was published a long time ago. Have other people proposed the same modification?