THE DUNLEAVY AND NISKANEN MODELS OF BUREAUCRACY: THE CASE OF THE AUSTRALIAN FEDERAL BUDGET SECTOR 1982-92

A substantial literature exists on the economic analysis of bureaucracy, which includes both the Niskanen (1971) and Dunleavy (1991) theories of bureaucratic behaviour. However, comparatively little effort has been expended on assessing the empirical validity of this theoretical literature. Economic models of bureaucracu yield testable predictions in terms of either allocative or productive efficiency. Direct tests of allocative efficiencyusing aggregate data have thus far failed to produce conclusive results. Best testing for allocative inefficiencies by examining the growth patterns of bureaus has the advantage of at least making it possible to exclude models which predict growth patterns that are not consistent with observed real-worM outcomes. This is the approach adopted in the present paper which employs data drawn from the Australian federal budget sector for the period 1982 to 1992 to evaluate the Niskanen (1971) and Dunleavy (1991) theories of bureaucracy. Social scientists have long been fascinated by the operation of public bureaucracies, and a vast research effort has been invested in an attempt to understand these complex organisations. Economists, who have only recently joined their colleagues from political science, public administration, social psychology and sociology in this exercise, have developed at least three interconnected approaches to the problem. Firstly, public choice theory represents a comprehensive attempt at explaining all collective or government behaviour by extending the methodology of homo economicus to the formulation and application of public policy (Mueller, 1990). Secondly, a derivative literature exists on the economic analysis of bureaucracy and the phenomenon of bureaucratic failure, which includes both Niskanen (1971) and Dunleavy (1991). And finally, explicit theories of government failure have been constructed by Wolf (1989), Le Grand (1991) and Vining and Weimer (1991). The present paper focuses on the second of these three economic approaches to public organisations, and more specifically, on the empirical validity of the Niskanen (1971) and Dunleavy (1991) theories of bureaucracy. The paper itself is divided into five main areas. Section 1 briefly reviews the Niskanen and Dunleavy models of public bureaucracies, and seeks to identify empirically testable hypotheses. Section 2 examines previous attempts the empirical evaluation of economic theories of bureaucracy, and the nature of the difficulties experienced, and suggests an alternative approach. Cross-sectional data drawn from the explanatory notes to Appropriation Senior Lecturer, Department of Economics, University of New England, Armidale NSW 2351, and Secretary, Senate Standing Committee on Finance and Public Administration, Parliament House, Canberra ACT 2600. The views expressed here do not necessarily reflect those of the Department of the Senate. Bills and the annual reports of bureaus in the Australian federal budget sector for the financial years 1982-83 and 1991-92 are scrutinised in section 3, whereas the empirical analysis of the Niskanen and Dunleavy models is undertaken in section 4. The paper ends with some brief concluding comments in section 5. 1. Economic Models of Bureaucracy Attempts by economists to model the behaviour of public bureaucracies date back at least as far as Von Mises (1945), and include notable efforts by Borcherding (1977), Breton and Wintrobe (1982), Downs (1967), Dunleavy (1991), Migue’ and Belanger (1974), Niskanen (1971) and Tullock (1974). But perhaps the first rigorous economic model of bureaucracy was developed by Niskanen (1968; 1971; 1975). Niskanen’s work provoked much subsequent modelling activity (surveyed by Bendor [1990]) but the basic Niskanen model is probably still the mainstream position of American public choice theorists (Mueller 1990, pp. 250-258; Buchanan 1983, pp.20-21). Its institutional assumptions are primarily those of the US political system (possibly in important regards those of a former US system [Goodin 1982, p. 38]), leading at least one prominent European public choice theorist to bemoan the continued absence of convincing economic theory of bureaucracy outside the North American institutional framework (Schneider 1991, p.199). Dunleavy’s (1985; 1989; 1991; 1992) work represents both a logical extension of the basic Niskanen model by weakening its heavy emphasis on budget maximisation, and simultaneously creates a theoretical framework more suitable for the analysis of Westminster-style bureaucracies, like those of Australia and the United Kingdom. The Niskanen Model In essence, Niskanen presents the relationship between a bureau and its sponsor (a government, government review group, or some other representative, collective body) as a bilateral monopoly. The bureau sells services only to the sponsor and the sponsor buys those services only from the bureau. Output is exchanged for a budget and not at a per unit price (Niskanen 1975, p.16). For the purpose of the model, there is one bureaucratic decision maker, the senior official in each bureau which has a separate, identifiable budget (Niskanen 1971, p.22). The bureau is funded by a single government review body which, in turn, is funded from taxes. Demand for the bureau’s output is first determined exogenously but at any level of demand bureaus will over-supply because the bureaucrats will seek to maximise the budget of their bureau. The total budget of the bureau is a logical maximand because budget size will be a positive monotonic function of what Niskanen assumed would be significant variables in the bureaucrat’s utility function: salary, perquisites of the office, public reputation, power and patronage. Other likely significant arguments in the bureaucrat’s utility function, such as ease of managing the bureau and ease of making changes, while not positively correlated with total size of the budget, would be affected positively by increases in the budget (Niskanen 1968, p. 350; 1971, p. 38). Niskanen argued that it is not necessary for the bureaucrat’s utility to depend strongly on each on these variables, merely that it be positively and continuously associated with the level of the budget (Niskanen 1971, p. 38). Budget maximisation itself will be subject to the constraint of the level of output expected by the government when it set the bureau’s budget. The full statement of the motivational assumption of Niskanen’s theory then becomes: "Bureaucrats maximise the total budget of their bureau during their tenure, subject to the constraint that the budget must be equal to or greater than the minimum total costs of supplying the output expected by the bureau’s sponsor" (Niskanen 1971, p.42). In a nutshell, the Niskanen model predicts that in representative democracies public bureaucracies will not only generate allocative inefficiency (by oversupplying public goods) but also x-inefficiency (by producing public goods inefficiently). The Dunleavy Model It is evident that the Niskanen model is heavily reliant on an American institutional milieu. Peacock (1987, p.237) has made this observation in a British constitutional context: ". [I]n the UK it would be entirely misleading to identify Niskanen’s ’bureaucrat’ with senior civil servants. The appropriate person is the Ministerial head of a Department of State who presents his annual estimates in the first and crucial instance to the Chancellor of the Exchequer for approval but with right of appeal to the Cabinet, a body of which he is normally a member". Peacock (1987) notes further that it cannot be assumed that a minister will behave in the way expected of Niskanen’s bureaucrat. Patrick Dunleavy, a British political scientist who set out to demolish the public choice arguments on bureaucracy, came instead in the end to develop a public choice model of bureaucratic behaviour which combines elements of Peacock’s insight with the original American model. The Dunleavy (1985, p.300) model of public bureaucracy is built on six basic assumptions. The first four are consistent with Niskanen’s model: bureau policies are set by bureaucrats interacting with the government; governments largely depend on information from bureaus about the costs and value of producing within given ranges of output; and bureaucrats maximise their personal utilities (by satisfying "self-regarding, relatively hard-edged preferences") when making official decisions. Added to these are two