Why are Government Bureaucracies Inefficient? A Prospective Approach

Abstract

Public bureaucracies are less efficient than private organizations in many of their activities. This is generally attributed to the absence of competition and of the profit motive, and to the particular constraints of public bureaucracies with regards to transparency and the weaker governance of the political market. But there is a more fundamental reason, and this is the argument developed in this paper. Organizations can be seen as a web of contracts binding stakeholders together. In any organization, overachieving employees deliver more than their so-called “relational” contracts call for. As a result, a net “organizational energy” is generated. While private organizations can easily channel this surplus energy into value-creating activities, public bureaucracies are less able to do that, and they have to rely on rules and other constraints to cope with it. The net effect is less efficiency. Only in selected activities such as policy-making can public bureaucracies aspire to be as efficient, and indeed, better equipped than private organizations.

Keywords: Government bureaucracy, organizational efficiency, organizational energy, relational contract, government efficiency

JEL Classification: D21, H11, J20, L32, L33