On the Cost of Opportunistic Behavior in the Public Sector: A General‐Equilibrium Approach

• Published date: 01 April 2017
• DOI: http://doi.org/10.1111/jpet.12206
• Date: 01 April 2017

ONTHECOST OF OPPORTUNISTIC BEHAVIOR IN THE PUBLIC

SECTOR:AGENERAL-EQUILIBRIUM APPROACH

ALEKSANDAR VASILEV

American University in Bulgaria

Abstract

This paper studies the wasteful effect of bureaucracy on the economy

by addressing the link between opportunistic behavior of government

bureaucrats and the public sector wage bill. In particular, public offi-

cials are modeled as individuals competing for a larger share of those

public funds. A simple extraction technology in the government ad-

ministration is introduced in a standard real-business-cycle setup aug-

mented with detailed public sector. The model is calibrated to German

data for the period 1970–2007. The main findings are: (i) the model

performs well vis-`

a-vis the data; (ii) due to the existence of a significant

public sector wage premium and the high public sector employment, a

substantial amount of working time is spent in opportunistic activities,

which, in turn, leads to significant losses in terms of output; and (iii)

the model-based loss measures obtained for the EU-12 countries are

highly correlated to indices of bureaucratic inefficiency.

1. Introduction

This paper studies the wasteful effect of bureaucracy on the economy by addressing the

link between opportunistic behavior of government bureaucrats and the public sector

wage bill. The main focus is on the nonproductive activities that occur inside public

administration and models them in a dynamic general equilibrium setting. In line with

Goel and Nelson (1998) and Persson and Tabellini (2000, p. 8.), the focus in this paper

will be on particular types of government expenditure, namely, spending on wages, and

its potential to produce rent-seeking behavior even in developed Western nations. This

is achieved by augmenting an otherwise standard real-business-cycle (RBC) model with

a government sector, public employment, and allowing those who work in the public

sector (“government officials”) to engage in opportunistic behavior. The framework in

this paper is then used to generate a theory-based measure for the cost of the waste

imposed on the economy, and proceeds to evaluate it against empirical indices of insti-

tutional quality and government sector efficiency.

Aleksandar Vasilev, American University in Bulgaria, Balkanski Academic Center 308, Blagoevgrad

2700, Bulgaria. (avasilev@aubg.bg).

This paper is based on Chapter 3 of the author’s PhD thesis. The author thanks James Malley,

Konstantinos Angelopoulos, and Milton Makris for the excellent comments.

Received May 12, 2016; Accepted June 9, 2016.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 19 (2), 2017, pp. 565–582.

565

566 Journal of Public Economic Theory

Table 1: Labor market facts 1970–2007

Average Public/Private Average Public/Private Public Wage Bill

Country Sector Wage Ratio Employment Ratio to Output Ratio

Euro Area 1.22 0.22 0.11

Austria 1.28 0.21 0.16

Belgium 1.28 0.29 0.26

Denmark 1.06 0.45 0.30

Finland 1.03 0.35 0.27

France 1.00 0.32 0.12

Germany 1.20 0.17 0.09

Greece 1.41 0.26 0.35

Ireland 1.22 0.24 0.31

Italy 1.30 0.26 0.11

Netherlands 1.69 0.17 0.18

Norway 0.87 0.44 0.27

Portugal 1.31 0.22 0.31

Spain 1.60 0.16 0.10

Sweden 0.86 0.51 0.40

United Kingdom 1.08 0.27 0.12

United States 1.08 0.16 0.10

Sources: Vasilev (2015b) and OECD Statistical Database (2011).

In part, the motivation behind this study is based on the sharp increase in public

sector employment observed in selected EU Member States in the post–World War II

era, together with the existence of a significant public wage premium, as documented

in Table 1, which in turn leads to an increase in the share of the public sector wage bill

in output. One possible interpretation of the numbers in Table 1 is the tendency for

bureaucracy to self-breed and expand independently. After all, the state is the largest

employer in the EU Member States. Importantly, this expansion in the size of the gov-

ernment administration and the subsequent expansion of the public sector wage bill

should raise concerns for policy makers, because labor productivity in the public sector

is difficult to measure, and a quantity corresponding to government production is also

hard to define, since public services are to a great extent nonmarket production.

To shed some light on some of the processes taking place within public administra-

tion, the model setup in this paper incorporates a repeated symmetric noncooperative

game that is played among government bureaucrats themselves to increase individual

income at the expense of the other public officials’ earnings.1The symmetric rent-

seeking process is modeled as in Murphy, Shleifer, and Vishny (1991)2: each individual

allocates time optimally on both productive and opportunistic activities. As in Burnside,

Eichenbaum, and Rebello (1993), the extraction technology increases one’s own ca-

pacity and at the same time decreases others’ capacity level. This modeling choice

is consistent with McKenzie and Tullock (1978), who describe public professionals as

1In the literature on bureaucracy, the studies by von Mises (1944), Parkinson (1957), Niskanen (1971),

and Tinbergen (1985) all focus on the strong competition for advancement within bureaus and the

interunit conflicts. In an important study, Rose-Akerman (1999) also argues that corruption, or rent-

seeking behavior, is embedded in the hierarchical structure of public administration.

2For surveys of the literature of rent-seeking, see Mueller (2003) and the references therein.