Bureaucracy, Monopoly, and Competition: A Critical Analysis of the Budget- Maximizing Model of Bureaucracy

Abstract

Niskanen has argued that if government bureaus act so as to maximize their budgets, they will always produce an output greater than a private industry, resulting in efficiency losses to society. Since the budget-maximizing model relates to a number of intersecting areas of organizational analysis from several disciplines, it is important to note the limitations of the model. First, Niskanen's result is only true for a bureau which can exercise perfect price discrimination in its relationship with its financial sponsor; where this is not the case, the bureau may produce less than a private industry. Second, further variation is introduced by examining the effects on a bureau of specialized resources, public goods, competition, and low productivity. A bureau which would otherwise produce an output in excess of the competitive level will, when any of these factors are present, produce an output closer to the competitive output. These results may also have significant policy implications, since major industrial countries are favoring policies to return some governmental activities to the private sector.

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