MPPO - 1 - Control of Bureaucracy

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MPPO: Agency Theory

John Burns

PPA/HKU



Outline

Theories of control of bureaucracy

Rational choice approach

Agency theory

± Critique



Theories of control of the

bureaucracy What is the bureaucracy?

Assumptions of this approach

±

Politics and administration are separate anddistinct

± Politicians should control the bureaucracy

Domains: mission, policy, administration,

management



Who controls the bureaucracy?

Bureaucracy

± Street-level bureaucracy; highly autonomous

Politicians

± Assumed by democratic theory

Interest groups (Capture theory underminedby deregulation; e.g., telecoms in HK)

Clients (Capture theory undermined byempirical cases; e.g., cutting CSSA in HK)



Collusion: US bureaucrats in bed

with oil industry From 2002-06 19 US Interior Dept employees

who oversaw oil drilling on federal land had

sex and used illegal drugs with workers of

energy companies where they were

conducting official business

Employees socialized with and received a

wide array of gifts and gratuities from oil andgas companies.

Source: SCMP 12 Sep 2008.



Is the bureaucracy out of control?

Empirical evidence from US says no(Frederickson & Smith, p. 32, 35) Finding: Bureaucracies are responsive to politicians and public

opinion

What about HK? ± Pre 1997; 1997-2002; since 2002 (Principal Official

Accountability System [POAS])

Yet, agency theory assumes that control of

bureaucracy is a major issue ± Bureaucracy hoards information, seeks autonomy,

shirks



How to view the nature of human

beings?

Altruistic, public spirited, etc or

Rational

±

Seek to protect own interest, especially in conflictwith the interests of others

± Utility maximizing

Boundedly rational

± Limited information

± Limited capacity



Former RTHK official guilty of fraud

Former RTHK assistant programme officer has

been found guilty of fraudulently claiming

HK$116,200 in copywriting fees from RTHK in

the names of her mother and brother.

SCMP 16.5.2008



Agency problems at RTHK

November 2007 Former DJ Roland Leung Yik-lun convicted of conspiracy todefraud over HK$10,600 in bogus claims for scriptwriting and research fees.Pleads guilty and ordered to perform 150 hours' community service.April 2005 Former programme co-ordinator Cheung Kin-man, 27, and friends HoYuen-yi, 34, and Yu Siu-kei, 35, are convicted of conspiring to defraud RTHK of

HK$740,000 by rigging tenders for production contracts. They receive suspendedtwo-year jail sentences.December 2004 Former senior programme officer jailed one year after earningmore than HK$400,000 from renting out a flat bought with government subsidies.October 2002 Richard Tsang Yip-fat, former head of classical music channel Radio4, found guilty of two counts of misconduct in public office. He is given a four-

month suspended sentence for disguising pay rises to two employees as paymentsto freelance workers.October 2002 Former head of RTHK new media section Amy So Tik-kar receivesdisciplinary action for not following rules on expenses claims.July 2002 Former producer George Mak Che-kin receives 16-month sentence for cheating the station out of almost HK$250,000.



Rational choice

Assumes rational self-interest is the primarymotivation of purposive action ± Individual utility maximization

Know preferences; can rank them; if given a choice will choseoption that fulfills preferences at least cost

Individuals pursue their goals in most efficient manner given costly inf ormat i on

Individuals are foreword looking anticipate the effects of their actions and actions of others on their welfare

±

Methodological individualism All collective decisions and actions are aggregation of

individual decisions and actions

Collectivities have no properties of their own



Rational choice assumptions about civil

servants

Seek to maximize own utility, not neutrally

competent

Want to maximize own life time income, power,

leisure

Lack perfect information, so are incapable of

effectively pursuing public interest even if some

altruism

Have no policy preferences

How w ell does thi s pi ctur e fi t civi l ser v ants in HK?



Do bureaucrats have policy

preferences?

y Policy preferences of administrators likely tobe moderatey Civil service attracts the risk averse;y Top officials select out extremist juniorsy In spite of policy preferences, incentives & sanctions

influence actual behavior y What if

y Police salaries were completely determined by fines,traffic tickets and the like

y Hong Kong?y Radio Television Hong Kong (RTHK); Environment;

Highways?



Criticisms of rational choice

Elegant, logical

But

±

Doubts about assumptions Incomplete assumptions (individuals sometimes

altruistic)

As normative theory equates market with democracy

± Mixed empirical support



Criticisms of rational choice

What are bureaucrats maximizing? Are budget maximizers, but dont benefit from this

Some studies have found bureaucrats to be budget minimizers Or maximize control over budget, not absolute size of budget

How responsive are bureaucrats? Evidence that bureaucrats are highly responsive to

politicians and public opinion (e.g., withdrawal of consumption tax proposal in HK)

Assumptions too narrow, fail to recognize thatbureaucrats may seek to maximize the publicinterest, professional or ethical norms, or avariety of group motivations that threatenmethodological individualism



Alternatives to rational choice

Public service motivation (PSM)

± an individuals predisposition to respond to

motives grounded primarily or uniquely in public

institutions

± Motive such as altruism, public spiritedness, care

for others

For research see Perry and Wise (1996).



PSM

Individuals may join public organization for

variety of reasons

± Rational

Working in public sector advances self interest

± Normative

Working in public sector is good or ethically correct

± Affective Working in public sector is emotionally fulfilling





Research on PSM

People with higher PSM scores tend to seek jobs in

public sector

PSM correlated with job satisfaction in public sector

People with higher PSM scores tend not to be

motivated by more material rewards

Implications for us

±

Will typical agency strategies be effective if assumptionsabout motivation are wrong?

See Gabris & Davis in Hays, Kearney, Coggburn (2009)



Still

Assumption that individuals (including civil

servants) maximize their own utility is widely

held

We recognize that the assumption doesnt fit

reality perfectly

We recognize that we are si mpl if y ing r eal i ty in

a search f or ex planat i ons f or civi l ser vi ce

behavi or



Agency theory

Sees principals (supervisors) and agents

(subordinates) in a contractual relationship

characterized by

± Conflicts of interest (because each is self-

interested)

± Information asymmetry (e.g., doctor and patient)





Principals and agents in HK

Assumed motives want to maximize income

+ leisure (some research support in HK)

General lack of policy preferences



Agency problems

Principal (supervisor) depends on agent toimplement policy

But agent may not do it because of conflicts of interest between them ± Hidden information (adverse selection)

± Hidden action (moral hazard)

So, principals (supervisor) takes action (adoptsstrategies) to reduce these problems



Supervisor responses

Careful selecting, monitoring, sanctioning,

tolerance

Designing incentive systems to reduce agencyproblems, that is, encourage working and

reduce shirking



These actions entail agency costs

Costs of selection and monitoring officials

Costs of ex post corrective devices (rewards,

sanctions, legislative direction)

Costs of any noncompliance that produces adifference between the policy enacted and asimplemented



Critique of agency theory

Assumption of single principal is unrealistic

± Multiple principles (which is primary? Unclear)

± Possibility of goal conflict among principles(agents choose among different principal goals?)

So, bureaucrats build coalitions, look for support for apolicy

Incentive for bureaucrat to leak or share information(so not pure information asymmetry)

So, information asymmetry may not be as common asagency theory assumes



Critique

Supervisors also have their own information,expertise advantages

± Consider AOs and technical experts

± So, level of information between principals and agentscan vary

Why assume goal conflict?

± Principals and agents may or may not agree onpolicy why assume disagreement?

± Principals and agents may cooperate



Critique

Should treat information asymmetry and goal

conflict as independent variables something

to be investigated and empirically verified.



Conclusion

In spite of criticisms, agency theory offers a

useful analytical framework

± Often is information asymmetry

± Often is goal conflict

± If there is, what implications does this have for the

behavior of civil service?

We use agency theory in this course but aremindful of its limitations

Documents

MPPO - 1 - Control of Bureaucracy