Use it or lose it

• Author: Doyoung Kim,Fahad Khalil,Jacques Lawarree
• DOI: http://doi.org/10.1111/jpet.12391
• Published date: 01 December 2019
• Date: 01 December 2019

J Public Econ Theory. 2019;21:991–1016. wileyonlinelibrary.com/journal/jpet © 2019 Wiley Periodicals, Inc.

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991

Received: 27 November 2017

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Accepted: 13 July 2019

DOI: 10.1111/jpet.12391

ORIGINAL ARTICLE

Use it or lose it

Fahad Khalil

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Doyoung Kim

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Jacques Lawarree

1,3

1

Department of Economics, University of

Washington, Seattle, Washington

2

Department of Economics, Sogang

University, Seoul, South Korea

3

ECARES, Brussels, Belgium

Correspondence

Jacques Lawarree, Department of

Economics, University of Washington,

Seattle, 98195, WA.

Email: lawarree@uw.edu

Abstract

We examine the optimality of budget policies imposed

by a funding authority on a bureaucrat who operates

under a fixed budget. In particular, we study a “use‐it‐

or‐lose‐it”(UILI) policy under which the bureaucrat has

to return any unspent budget without being able to “roll

over”any part to the next period. Instead of returning

the unspent budget, the bureaucrat can go on a spending

spree and engage in policy drift, which is inversely

related to his motivation. The bureaucrat’s motivation

represents how well matched he is with the bureau-

cracy’s mission. We show that a UILI policy is

complementary to motivation as it has stronger ex ante

positive incentive effects on more motivated bureau-

crats. Such ex ante positive effects can overcome the ex

post inefficiency of the policy and make a UILI policy

optimal when the bureaucrat is well matched with the

bureaucracy’s mission or when its budget is large.

KEYWORDS

budget, bureaucracy, incentives, intrinsic motivation, optimal

contract, policy drift

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INTRODUCTION

Many bureaucracies operate with fixed budgets under a “use‐it‐or‐lose‐it”(UILI) policy. If their

budget is not spent by the end of the fiscal year, they must return any unspent budget to the

funding authority.

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This creates incentives for bureaucrats to spend any remaining budget in

year‐end spending sprees. For instance, bureaucrats offer generous contracts, procure

unnecessary equipment, and travel to exotic places for conferences at the end of fiscal year.

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This phenomenon is observed in many countries as shown in a 2009 IMF report (Lienert & Ljungman, 2009). It is also the case for a majority of federal and

state agencies in the United States, and for many private organizations.

Colorful examples of wasted expenditures abound. The Senate Homeland Security and

Governmental Affairs Subcommittee Chairman Sen. Rand Paul said he found old cartridges

stacked to the ceiling for an obsolete printer that a previous subcommittee chairman ordered in

an end‐of‐year spending binge.

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A recent report from the Veterans Affairs Office of the

Inspector General (2016) identified $311,000 spent on television sets that were put into storage

and never used. This phenomenon is not limited to the United States. In Canada, where the

fiscal year ends in March, this period is known as “March Madness.”

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Congress has long been concerned with the implications of UILI, which are summarized in

numerous General Accounting Office (GAO) reports.

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For example, the 1980 GAO report notes

that “Waste occurs through funding of low‐priority projects, stimulating demand for unplanned

products or services and shortcutting the procurement process.”To discourage wasteful

spending sprees at the end of the fiscal year, Congress introduced a bipartisan bill in 2017 with

financial bonuses for public employees who identify and return unused funds.

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Nonetheless, there has been very little research by economists on the topic as noted by

Liebman and Mahoney (2017). Analyzing US federal procurement spending, they show that

expenditure in the last week of the fiscal year is 4.9 times higher than the weekly average for the

rest of the year, and that year‐end projects are associated with a significant drop in quality

scores. Stressing the inefficiency of such budget policies, they calculate that allowing

bureaucracies to roll over unspent budgets into the subsequent fiscal year could lead to

welfare gains of up to 13%.

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Proponents of UILI cite loss of policy control and oversight if agencies are allowed to roll

over unspent budgets.

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Although UILI may lead to inefficient year‐end spending, by restricting

expenditure to a well‐defined time period, UILI allows for regular monitoring of spending

obligations. Accordingly, a recent International Monetary Fund report cautions against hasty

moves to allow rolling over of unspent budgets, arguing for strict restrictions if it is to be

allowed (Lienert & Ljungman, 2009).

In this paper, we suggest another benefit of UILI. We present an economic rationale for UILI

by highlighting a typically ignored benefit of this policy and the role of motivation of

bureaucrats. We show that UILI provides a bureaucrat with ex ante incentives to exert effort to

make the bureaucracy more efficient. The key observation is that a spending spree also

represents a penalty for a bureaucrat who cares more about the mission of the bureaucracy than

those last minute spending sprees and will therefore exert effort to avoid such last minute

spending. Thus, we argue that being able to roll over unspent budgets may help reduce ex post

inefficient spending, but it would hurt ex ante incentives relative to UILI.

Our model of bureaucracy has two key elements: a fixed budget and a motivated bureaucrat.

First, most bureaucracies operate under fixed budgets that are largely unrelated to their

performance. There is a large literature in political science arguing that funding authorities

should have little control over bureaucratic agencies other than being able to fix their

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Subcommittee on Federal Spending Oversight and Emergency Management (2017).

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For instance, see the CBC report, “Rush order for 31,000 smartphones signals return of 'March Madness' budget rush”(2018), https://www.cbc.ca/news/

politics/march‐madness‐fiscal‐smartphones‐1.4634779.

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General Accounting Office reports 1980a, 1980b, 1985, and 1998.

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Bonuses for Cost‐Cutters Act of 2017 (https://www.congress.gov/bill/115th‐congress/senate‐bill/1830).

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Similarly, surveying practitioners in Department of Defense financial management and contracting communities, McPherson (2007) found that 75% favor the

ability to roll over unspent budgets.

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When the funding authority is Congress and its members run for re‐election, they will want their constituencies to benefit from the allocated budget before the

next election.

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KHALIL ET AL.