Above Politics: Credible Commitment and Efficiency in the Design of Public Agencies

Abstract

The state has, since its origins, been characterized both by the production of public goods and a competition for the surplus benefits generated by the creation of those goods. Holmstrom 's (1982) analysis of an impossibility result leads to the conclusion that this problem is logically inescapable. There is no process for exactly allocating the benefits of an interdependent social process that eliminates moral hazard. Furthermore, morally hazardous behavior can undermine the efficiency of the processes that generate the benefits. In both firms and states, therefore, the credible constraint of morally hazardous behavior is a fundamental concern. In both forms of social organization, delegation to bureaucracy can enhance efficiency by creating barriers between those actors with moral hazard and the producers of the benefits. The characteristics of Weberian bureaucracy, including rational/legal constraints and autonomous professional norms, serve to insulate bureaucrats from efficiency-undermining political pressures. This perspective provides support for concerns of the century-old Progressive reform tradition, which wanted to place bureaucrats "above politics"-and stands in contrast to the more recent principal/agency perspective, which argues that the fundamental problem is the creation of incentive systems that make bureaucratic subordinates increasingly responsive to the preferences of political superiors.