Williamson (1999) - Public And Private Bureaucracies

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• This page is referenced in BPP Field Exam Papers

Reference(s)

Williamson, Oliver E. (1999), "Public and Private Bureaucracies: A Transaction Costs Economics Perspective", Journal of Law, Economics and Organization, Vol 15, March pp. 306-342. pdf

Abstract

No abstract available at this time.

Vocabulary

Probity - Complete and confirmed integrity; uprightness. In this paper: "the loyalty and rectitude with which the foreign affairs transaction is discharged".

Introduction

The public finance view is that agencies are omnipotent, omniscient and benevolent instruments,

The property rights view of public agencies is that they are inefficient and that this inefficiency can only be rectified by correctly assigning property rights.

The transaction cost view is that public agencies are a mode of governance which is well suited for some tasks and not others.

This paper considers the discrete structural attributes that define and differentiate public bureaus.

Transaction Cost Politics

The seperation of powers in government auger against efficiency - the seperation of powers makes laws hard to enact and yields over formalized bureaucracies. Moe (1990) makes the following points:

1. A comparison between markets and hierarchies does not apply in the public sector - there are no markets for many goods produced.
2. There is not a presumption of efficiently structured relationships because:
   1. Political actors are unable to sell their rights to exercise authority
   2. The need for compromise gives rise to expediency and not efficiency
3. Trade is coercive not free - there are no assurances of mutual gains.
4. Asset specificity does not apply perhaps?

Options in evaluating public agencies include the "zero transaction cost criteria" of North (1990) or the "remedialness" criteria.

Questions and answers

1. What is the basic transaction cost setup - compare feasible modes of organization based on an economizing criteria
2. What added hazards are there in the public sector - probity, at least in sovereign transactions
3. What structural attributes deals with these hazards - added staffing, leadership and their process ramifications
4. Can a private bureau replicate a public one, perhaps with regulation - No, it is impossible

Key attributes of Transaction Cost Economics

Human Actors

Human actors have bounded rationality and will engage in opportunism. TCE supposes that actors can look ahead to see these hazards and factor them into organization design.

Governance

The transaction includes three dimensions that are crucial to a unit of observation (Commons, 1932):

1. conflict
2. mutuality
3. order

The discriminating alignment hypothesis aligns transaction attributes to governance structures to economize. This involves:

1. Identifying the key attributes that differ across transactions
2. Stating the core trade-offs of organizations
3. Identifying the structural attributes that differ between governance structures

Transaction cost economizing is most important with respect to adaptations, which are either autonomous or cooperative (see Williamson 1991). Governance systems that feature autonomy encourage independence and enterprise, whereas those featuring cooperation encourage compliance and mission orientation.

Sub goals allow for specialization in a firm, but bring conflict with larger goals. Opportunism complicates this by adding strategic effects (as opposed to instrumental). This does doesn't matter without identity (competition solves it), but with identity continuity considerations are needed - essentially there must be long term contracts. As maladaption hazards become great, unified ownership will supplant interfirm contracting.

Market mode has high incentives, low administrative controls and legalistic dispute settlements. Hierarchies have low incentives, high administrative controls, and fiat. Hybrids are in between.

The Schema

• [math]k\,[/math] is the index of contractual hazard (think: "degree of asset specificity")
• [math]s\,[/math] is the contract safegaurds (think: degree to which the contract supports adaptations, through arbritation or fiat)

             The Williamson (1999) Schema

                    A (unassisted market)
           k=0    / 
                /
              /           B (unrelieved hazard)
              \     s=0 /
                \     /
           k>0    \ /           C (hybrid contracting)
                    \         /
                      \     / Market Support
                    s>0 \ /
                          \
                            \ Administrative Support
                              \ 
                                D (internal organization/firm)
                                

The Remediableness Schema

Frictionless ideals can not be implemented. The remedialness criterion holds that:

"[a]n extant mode of organization for which no superior 
'feasible' alternative can be decribed and 'implemented'
with expected net gains is 'presumed' to be efficient.
                                           -Williamson, 1999
                                           

All that we can ask is that farsighted economic actors do their best, given their limitations.

There are the following caveats:

• Differential implementation costs should be included in the calculus
• There may be unacceptable initial conditions
• There may be unacceptable operating practises
• Conceptual error
• Pathology is possible,

Unacceptable initial conditions can be general (corruption allows implementation) or specific (e.g. voting rights only assigned to a portion of the population). Strategic practices that prevent entry or limit rivals matter. As does a mistaken conceptual calculus (i.e. judging anti-trust without understanding natural monopolies). Finally, an entity may take on a life of its own, far from its original envisioned purpose.

Public Sector Transactions

The paper identifies six types of transactions carried out by public bureaus.

1. Procurement - special circumstances aside government should rarely produce its own needs; competition provides safegaurds for mundane procurement and procurement involving asset specificity is apt to be politicized.
2. Redistributional - broadly based can be privatized but narrow focused (or special interest) redistribution is liable to capture and is highly politicized.
3. Regulatory - These are beset by asset specificity problems. Rate of return regulation is often best. Regulation to deal with information asymmetries is often highly politicized.
4. Sovereign transactions - see below.
5. Judiciary - an independent judiciary infuses confidence in investment and contract, but nevertheless judiciaries often have relationships with politics. This is beyond the scope of the paper.
6. Infrastructure - This is mainly a matter for state and local government.

Sovereign Transactions

Transaction cost analysis considers hazard mitigation through ex-post governance. With incomplete contracts, solving problems through ex ante incentive alignment is untenable. Governance mechanisms therefore provide:

• ex post gap filing
• dispute settlement
• cooperative adaptation

Sovereign transactions have two contractual hazards:

• Asset specificity
• Probity

Asset specificity comes through human assets, and is resolved by:

• added security of employment
• more fully developed information disclosure
• refined dispute resolution mechanisms

Probity, here defined as the loyalty and rectitude with which the foreign affairs transaction is discharged, is key. It has three parts: vertical, horizontal and internal. Vertical is the relationship between the president and the agency, horizontal is the relationship with other agencies, and internal is internal to the agency.

The underlying principals associated with sovereign transactions are:

1. abiding respect for the mission
2. reliable responsiveness to the president
3. accurate communication to counterparties of intent.

Williamson goes on to argue that only within a public bureau with low powered incentives, meticulous implementation of protocol, and high stability of employment, can probity be assured, also noting that autonomous adaptations will be low. Operating cost excesses are essentially irrelevant, and third order. Specifically, note that treason is a the punishment for violating probity in a public bureau, whereas termination of employment is the private equivalent.

Adaption entials the following steps:

1. the occasion to adapt needs to be disclosed
2. alternative identified
3. ramifications worked out
4. best adaptation decided
5. choosen adaptation communicated and accepted
6. adaptation implemented
7. follow up assessments
8. sequential adjustments

Holdup is in (5), but probity operates throughout.

Private implementation is deemed impossible, on the grounds of insufficient probit gaurantees. Regulation is also dismissed, partly on the basis of control difference of both omission (the regalator is one step removed) and commission (the regulator is positioned between the president and the firm), partly on the basis of leadership (the president may not be able to appoint his own person to head the regulator), and operational complaints (how does the government know that it is properly informed).