The budget-maximising bureaucracy

The basic idea

The economist William Niskanen proposed in 1971 a model in which the heads of a public institution (a “bureaucracy”) have a structural incentive to maximise their budget, not necessarily to minimise the cost of the service provided. The reason: a bigger budget brings the head of the institution more staff, more prestige, more decision-making power and better chances of promotion: personal benefits, distinct from the efficiency with which the institution does its job^[1].

Unlike a private firm, where profit (revenue minus costs) is a direct signal of efficiency, a public institution has no such signal: its budget comes from a political negotiation, not from sales to customers who can choose not to buy. Niskanen showed that, without such a signal, an institution that controls the information about what its service really costs (an information asymmetry towards those who approve the budget) can systematically obtain more money than would be necessary.

Where the theory explains phenomena documented in other pillars

The model offers a framework for two recurring phenomena: the proliferation of agencies with overlapping remits (each new institution means a new budget and a new head) and resistance to merging or abolishing small structures (a commune, an agency, a local office: every merger means a budget and a management position disappearing).