Goal Displacement: Assessing the Motivation for Organizational Cheating

A major problem in assessing bureaucratic performance is the difficulty in judging the final social outcomes stemming from the work of public agencies. As a result, public agencies are frequently evaluated based on the outputs they produce. Agency outputs (such as, criminal cases solved, inspections) are easier to measure than the actual contributions agencies make to social outcomes (such as, preventing workplace discrimination, protecting the environment). When agency performance is evaluated in terms of numerical outputs, bureaucrats have an incentive to maximize outputs, regardless of whether maximizing outputs is the preferred strategy for achieving desired social outcomes (a form of goal displacement). This incentive to maximize outputs may lead to organizational cheating, in which public agencies purposely manipulate output levels to portray their work in the best light possible.
This study examines the problems of goal displacement and organizational cheating in Texas public schools. Specifically, we examine the degree to which school districts cheat to manipulate student pass rates on standardized exams. School districts "cheat" by liberally exempting certain students from these exams in hopes of raising overall district pass rates. Scarce institutional resources and extreme task demands are associated with cheating. From a management perspective, this study demonstrates the problems in implementing performance standards. From an academic perspective, it provides the first theory about when and why organizations cheat.     

Moral hazard in work organizations: A comment on Gaynor,Eswaran and Kotwal,and Holmström

A key question in the economics of organization is whether it is possible to induce a group of employees to produce some quota of labor desired by the director of their organization. Holmström (1982) argued that it is possible to achieve the desired result via a simple incentive scheme. The essence of the scheme is to pay the employees only if they reach the quota; if they fail, the director is allowed to take what they have produced and use it for his own compensation. In response, Eswaran and Kotwal (1984) pointed out that because the director's compensation is smaller if the employees succeed in reaching the quota than if they fail, he has an incentive to bribe an employee to shirk, thus guaranteeing that the quota is not reached. The director, in other words, is subject to moral hazard. In a recent issue of Public Choice, Gaynor (1989) criticized the Eswaran-Kotwal argument by suggesting that it is possible to design incentive schemes which eliminate the director's moral hazard problem. In this note, we defend the Eswaran-Kotwal argument, and raise further questions about the assumptions upon which Holmström's incentive scheme is based.     

Contests Among Bureaucrats

This paper deals with double lobbying: several bureaucratsparticipate in joint lobbying to get a high total departmental budget, butthey also engage in antagonistic lobbying to reap as high a share of thetotal budget as possible. The antagonistic lobbyingconstitutes a contest among the bureaucrats. This papercharacterizes the Nash equilibria in lobbying and shows inwhich way exogenously fixed bureaucratic incomes induce thesame or different lobbying behavior as incentive incomes.     

Politischer Opportunismus und Haushaltsdefizite in den westdeutschen Bundesländern

This article analyzes fiscal political business cycles in the West-German Länder. By linking the theory of political business cycles with the insights of the theory of economic voting, I argue that the German Länder governments do not have an incentive to raise the budget deficit in order to signal economic competence to the electorate. Despite having an incentive to spend more before an election in order to provide public goods to the voters, governments cannot finance the supply of public goods with higher deficits because voters prefer healthy fiscal policies. An empirical analysis of the West-German Länder between 1970 and 2003 bolsters the theoretical claims. A government that expands the deficit before an election thus experiences a loss in voter support. Consequently, governments tend to reduce the budget deficit in pre-election years.     

Executive Authority, the Personal Vote, and Budget Discipline in Latin American and Caribbean Countries

Recent scholarship on budgeting in Latin American and Caribbean (LAC) countries indicates that political institutions impact the level of budget discipline. Building upon this previous research, we argue that the principal problem that must be addressed in both the government and the legislature to insure strong fiscal discipline is the common pool resource (CPR) problem. At the cabinet level, the CPR problem arises because ministers consider the implications of decisions on their ministries only. The level of the CPR problem in the legislature depends upon the electoral system. Using a data set of LAC countries for the period 1988–97, we find that executive power in the budget process is most effective in reducing budget deficits when electoral incentives for the personal vote is high in the legislature, while strengthening the president (or prime minister) in countries where the personal vote is low in the legislature has no effect .     

Government Incentives when Pollution Permits are Durable Goods

This paper analyzes the incentive effects of pollution taxesversus pollution permits for a budget oriented Government.Pollution permits are analyzed as durable goods, and apollution tax is seen as being equivalent to leasing outpollution permits. First, a general model is developed, andthen four stylized types of Government are discussed (abenevolent dictator, a pure Leviathan, a green and a business-friendly Government). We show that all types of Governmentprefer a pollution tax system, but this regime is notnecessarily the best in social welfare terms. The intuition isthat a tax or leasing system makes it easier for theGovernment to credibly commit to the budget maximizing levelof pollution permits which is good for Government revenues,but not necessarily for social welfare.     

Central Banker Contracts, Incomplete Information, and Monetary Policy Surprises: In Search of a Selfish Central Banker?

Approaching monetary policy as a principal-agent problemprovides a useful framework for interpreting alternativedelegation schemes. In this paper, we consider theeffectiveness of central banker incentive schemes when theprincipal delegates monetary policy through contracts butremains uncertain about the central banker's responsiveness tosuch schemes. We adopt a simple principal-agent model andassume that the central banker's trade-off between socialwelfare and the incentive scheme is private information. Weconsider two types of central bankers; one who responds to theincentive scheme (``selfish'') and one who does not and onlycares about social welfare (``benevolent''). We demonstratethat when a benevolent central banker accepts a contractdesigned for a selfish central banker, positive inflationsurprises occur and output exceeds its natural rate. Wefurther show that a benevolent central banker with aninflation bias has an incentive to masquerade as selfish.Mechanisms exist that solve that problem by achievingpreference revelation. We consider a simple mechanism indominant strategies that induces the benevolent type eithernot to breach or not to accept the appointment (contract) inthe first place. This multi-period mechanism works with eitherinflation targets, or the appointment of a conservativecentral banker. Our results suggest that more complicatedincentive schemes, embedded within broader constitutionalarrangements, are required in the presence of privateinformation for them to work effectively.     

More on moral hazard in organizations: Reply

The paper by Thomas Hammond and Gary Miller is an insightful comment on the relevance of budget-breaking incentive schemes to real world organizations. They have made a valuable contribution in considering this line of research within a broader context. Nonetheless, they have not established the invalidity of my theoretical arguments. Therefore, my basic point still holds: that is, theoretically it is possible to show that a bonus-penalty incentive scheme of the sort proposed by Holmström is feasible, despite the principal's incentive to cheat. Regardless, all of this debate may beg the question, since compensation arrangements observed in the real world are rarely of the bonus-penalty type. Linear incentives are far more common, and many compensation schemes do not appear to incorporate optimal incentives. At this point we need more empirical research on the determinants of incentives in organizations. In order to make further advances in this area, a better understanding of the incentive mechanisms actually used in organizations is required.Thanks are due to Richard Frank for helpful comments. The usual caveat applies.     

The demand revealing process: To distribute the surplus

Contrary to established, frequently repeated proposition that its budget surplus cannot be distributed to taxpayers without disturbing the incentive compatibility of the demand revealing process (DRP), the surplus can be distributed by reapplying the key concept of the DRP. There will remain an aggregate refund error that in a Bayesian sense is random with zero mean, and which vanishes O(1/N)² as the economy becomes large through replication. To dela with income effects. when one does not restrict the domain of the mechanism to separable utility functions, I suggest a variation of the DRP that preserves its incentive compatibility wgeb N is finite.     

Management Strategies and Budgetary Politics

The study of public sector budgeting, particularly at the state level, has been dominated by incremental models of decision making. As a result, the budget has not always been viewed as an effective management tool for governors and other senior state officials. However, there are several critical issues which state leaders repeatedly face and for which the budget is the principal instrument for implementing decisions. This article identifies four key issues for the strategic management of state government and relates alternative approaches to each issue to the nature of budgetary politics. The first section raises the issues in the form of four questions. The next sections present alternative answers and discuss their political implications. Where appropriate, examples from the state of New York are included.     

On the political economy of national tax revenue forecasts: evidence from OECD countries

Sustainable budgets are important quality signals for the electorate. Politicians might thus have an incentive to influence tax revenue forecasts, which are widely regarded as a key element of national budget plans. Looking at the time period from 1996 to 2012, we systematically analyze whether national tax revenue forecasts in 18 OECD countries are biased due to political manipulation. Drawing on theories from the field of political economy, we test three hypotheses using panel estimation techniques. We find support for partisan politics. Left-wing governments seem to produce more optimistic, or less pessimistic, tax revenue forecasts than do right-wing ones. Contrary to the theoretical prediction based on the “common pool” problem, we find that more fragmented governments and parliaments tend to produce more pessimistic, or less optimistic, tax revenue forecasts. We find no empirical evidence that political business cycles play a role in tax revenue forecasts.     

Is the U.S. Congress an Insurmountable Obstacle to Any “Far‐Sighted Conception of Budgeting”?

In recent years, Congress has recurrently failed to meet its minimum responsibilities in federal budgeting. This article analyzes whether it is possible to repair this problem, using concepts popularized by Allen Schick in his influential article “The Road to PPB.” His article compared the PPB reform effort to the history of budget process reforms that started with the design of the executive budget. It publicized a logical sequence of budget process improvements that started with control and then advanced through management and planning. The article did not substantially address the role of Congress, but eight years after it was published, Congress reasserted its constitutional role in the budget process. Its record of performance since then has ranged from mixed to dysfunctional. The Congress has been criticized for budgetary delays, micromanagement, myopia, procrastination, indiscipline, and an inability to prioritize intelligently. If these faults are set in stone, then an integrated system of budgeting, as described in “The Road to PPB” and related work, is unattainable. On the other hand, if reform of Congressional budgeting is politically feasible, improvements to that system can utilize the unique contributions that a legislature can make to a good system of budgeting.     

China's Local Political Budget Cycles

This article examines the political budget cycles in Chinese counties. The shift to a more performance-based cadre evaluation and mobility system during the reform era has created an incentive structure for local leaders to increase government spending at strategically important time points during their tenure to enhance the prospect of official promotion. Such expenditures help local leaders to impress their superiors with economic and political achievements, especially those visible and quantifiable large-scale development projects. At the same time, economic and fiscal decentralization increased the capacity of local leaders to influence government budget expenditures as the need rises. The hypothesized curvilinear relationship between a leader's time in office and increased spending was tested using a comprehensive data set of all Chinese counties from 1997 through 2002. The panel data analysis shows that growth in local government spending per capita is the fastest during a leader's third and fourth years in office.     

Optimal procurement contracts under a binding budget constraint

The traditional literature on agency models predicts that, for zero liability contracts, it is optimal for the principal to pay for the information he cannot observe. However, this principle is not valid for a set of contracts mostly used by government agencies whose distinguishing feature is represented by a stringent budget constraint for the principal. This paper shows that in this environment the principal will either choose a structure exibiting pooling or a bargaining solution. The bargaining solution represents the analytical proof to the intuition of the difficulty in implementing procurement contracts stated by Laffont and Tirole (1993).     

Do Individuals Value Distributional Fairness? How Inequality Affects Majority Decisions

The so-called chaos theorems imply that, under most preference configurations, majority voting in n-dimensional policy spaces is theoretically unrestricted. Empirical research, however, shows an apparent stability of democratic decisions. Recent theoretical developments have emphasized social preferences as a possible explanation for overcoming majority rule’s instability problem. Hence, it is assumed that individuals not only maximize their own well-being, but also value distributional fairness. However, there is little experimental research into the influence of social preferences on majority decisions. This article presents findings from laboratory experiments on majority decisions in two-dimensional policy spaces with a systematic variation of the fairness properties of the incentive structures. The results show that distributional fairness is an important motivational factor in democratic decisions.     

参与式预算的公共投资效率意义——以浙江温岭市泽国镇为例

主要的论题是政府在公共预算制定过程中,通过怎样的机制实现公共投资效率的最大化.采用了规范研究与实证案例研究相结合的研究方法.研究表明,公共投资效率的涵义是公共投入为相关民众带来福利的最大改进,其规范性制度意义是相关民众就公共预算方案达成一致同意.研究指出,实现公共投资效率的核心问题是居民偏好的有效表达与偏好的集结;基于偏好表达与偏好集结的不可能性困境,在居民偏好给定的情况下,通过居民参与公共预算方案的讨论与协商,居民的偏好能够有效表达,并在协商过程中理性地、非强制地改变自己的偏好,进而就公共决策达成一致同意.浙江省温岭市泽国镇实施的参与式公共预算模式,有效解决了公共投资决策中的偏好表达与偏好集结的问题,促进了公共投资效率的实现,在基层公共预算制度改革中具有普遍意义.居民在公共预算制定过程中的协商参与,不仅使得政府公共决策具有了政治上的合法性,公共决策满足了民众需求,更重要的是促进了公共投资效率的实现.     

参与式预算与政治生态环境的重构——新河公共预算改革的过程和逻辑

新河的参与式预算为我们提供了一份从体制外自发生长到体制内有机融洽为过程,以民主理财,完善委托代理机制为主要内容,以公众参与为基础,以激活人大机制为目的,以重构政治生态环境为指归的独特的文本.通过对其的解读,试图回答公共预算改革为什么会发生在新河;如何使政府的目标函数与公众的偏好相符合;通过什么样的路径缩短委托代理链;新河预算改革的实际意义和应用价值何在;今后的指归是什么.新河的参与式预算是一个基于公众与政府之间和谐理念而设计出来的制度创新,是对传统公众与政府之间关系的一种变革.通过这样的创新和变革,树立了凡是与公众有关的事情都应让公众知道的思想,提高了预算编制的透明度和参与度,践行了治国的根本.这是一次人大与政府互动关系的良好发端,通过激活人大而对政府实行真正的制衡,是政治生态环境的重构过程,是新河参与式预算的实际意义所在.新河的阳光试验,正在为我国的公共预算改革探路,并为之积累经验,它将成为我国民主政治建设的一个新的起点.     

Competition of Politicians for Incentive Contracts and Elections

When politicians are short-term oriented or future elections do not sufficiently reflect the success of past policies, democratic elections cannot motivate politicians to undertake long-term socially beneficial projects. When politicians can offer incentive contracts which become effective upon reelection, the hierarchy of contracts and elections can alleviate such inefficient decision-making in politics. This mechanism still works if the public cannot commit itself to a reelection scheme or if the public is unsure about the politicians’ time preferences. In the non-commitment case, incentive contracts may need to include a golden parachute clause.     

社会治理共同体及其实现机制

中共十九届四中全会提出“建设人人有责、人人尽责、人人享有的社会治理共同体”。共同体的观念起源于古典时期,建立在义务本位的基础上。现代共同体是建立在美国早期新自由主义以及当代社群主义基础上的概念,当前全球“社区复兴运动”与之一脉相承。“人人有责、人人尽责、人人享有”是一个整体,人人有责、人人尽责是建设社会治理共同体的路径,人人享有既体现了与责任、义务相对应的权利,更要求为人人有责、人人尽责提供激励机制。孟加拉国格莱珉小额信贷模式、浙江桐乡“三治信农贷”、浙江温岭民主恳谈会和参与式预算等三个案例表明,人人有责、人人尽责的激励制度必须以特定共同体的政治与文化背景为前提;政府是重要的制度供给主体,但制度执行必然要求获得多元主体协同;制度可持续的关键在于所有主体利益相容且在制度框架下实现共赢。     

Efficient bilateral taxation of externalities

We consider the quadratic voting mechanism (Lalley and Weyl in Quadratic voting. Working paper, University of Chicago, 2015; Weyl in The robustness of quadratic voting. Working paper, University of Chicago, 2015) and focus on the incentives it provides individuals deciding what proposals or candidates to put up for a vote. The incentive compatibility of quadratic voting rests upon the assumption that individuals value the money used to buy votes, while the budget balance/efficiency of the mechanism requires that the money spent by one voter by redistributed among the other voters. From these assumptions, we show that it follows that strategic proposers will have an incentive to offer proposals with greater uncertainty about individual values. Similarly, we show that, in an electoral setting, quadratic voting provides an incentive to propose candidates with polarized, non-convergent platforms.