The Internal Organization of Government

So far, incentive theory has been mainly motivated by and applied to private organizations. Yet, in view of the important role played by civil servants and politicians in our economies, it is worth asking what differentiates a corporate executive and a government official. The first part of the paper discusses some specificities of the design of incentives in the public sector: Multiplicity of goals, unclear weighing of these goals, and nonmeasurability of some of them; lack of comparison; heterogeneity of tastes and dispersion of principals. It is argued that these features call for low-powered formal incentives. The second part of the paper discusses some implications of low-powered incentives. First, career concerns, associated with the prospect of reelection, promotion or employment in the private sector, are at least as pervasive as in the private sector. Career concerns are articulated around some mission that is pursued by the government official. This mission however need not be the socially desirable one. Indeed, there is a potential multiplicity of missions that can be followed by rational officials. Furthermore, composite missions that reflect the several goals of social optimization may not be in the official's self interest. Our economic analysis here complements recent work in political science on government agencies. Second, the paper discusses the issue of regulatory capture and corruption, and how institutional design may naturally respond to low-powered incentives. While the second part of the paper analyzes individual incentives, the third part studies the division of labor within government: 1) Intertemporal division of labor between successive administrations and constitutional limits on commitment by the State. 2) Division of labor between the government and the private sector and the costs and benefits of privatization. 3) Division of labor among ministries and the use of multiple principals to control economic agents. 4) Division of labor aimed at creating information for public decision making and the use of enfranchised advocates of specific interests.