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Inefficiency is a Matter of Perspective

The Limits of Bureaucracy

Research by Canice Prendergast

Bureaucracies are widely perceived as inefficient. However, what is considered inefficient in comparison to the private sector may simply be inherent to bureaucracies. A recent study suggests that the solution may involve changing the nature of bureaucratic oversight.

According to University of Chicago Graduate School of Business professor Canice Prendergast, people from a variety of professions, from doctors to police officers, fall under the umbrella term, "bureaucrat." Bureaucrats are any people who have the power to assign something to a consumer.

In the recent study, "The Limits of Bureaucratic Efficiency," Prendergast focuses on bureaucratic oversight and decision making to identify the constraints that make efficiency in bureaucracies difficult to attain.

Prendergast suggests that bureaucracies are never actually "efficient" by common economic standards because the features that lead to their use also make them inefficient. Bureaucracies are given the task of assigning goods that consumers cannot be trusted to allocate to themselves. The main way bureaucracies oversee their employees is through consumer complaints, but in regards to public sector goods, consumers cannot be trusted to voice their concerns in an efficient manner, and there are many hidden costs to increased bureaucratic oversight.

"Economists typically are skeptical of bureaucracies because of their perceived political ties and supposed laziness," says Prendergast. "I would suggest not blaming the bureaucrats so much. Calling them inefficient may just mean that the way bureaucrats do their jobs does not look the same as the private sector."

Consumer Complaints

In the public sector, job performance is difficult to measure. Bureaucrats are rarely offered pay-for-performance incentives, nor are they rewarded based only on the allocations they propose. For example, police officers are not rewarded when they make an arrest, nor are benefit officers rewarded when they deny benefits to a consumer.

Given the lack of available measures for performance, bureaucracies mainly rely on consumer complaints to determine whether or not an employee is performing adequately. Most public agencies have complaints procedures that the public can use.

Many goods allocated by the public sector are benefits, such as citizenship or unemployment insurance, which consumers would like to receive even if it is not warranted. As a result, consumers are often unwilling to point out known errors. Guilty suspects have no reason to point out a police officer's error in not making an arrest, nor do unqualified immigrants offer up their green cards when incorrectly allowed into the country.

Typically, consumer preferences do not correspond with social welfare. As a result, bureaucratic investigations will be less focused because consumers cannot be trusted to reveal that an error has been made.

Bureaucratic oversight is not random. Agencies typically look for signs of error (police brutality, medical malpractice, charges of racism in issuing visas and green cards) before they intervene. Investigations are targeted to cases where a mistake is likely to have been made, typically triggered by signs of wrongdoing.

Prendergast suggests that using consumer complaints as the main form of bureaucratic oversight can lead bureaucrats to develop harmful job incentives. Bureaucrats are well aware that their performance will be under the spotlight when complaints are lodged against them, so from their perspective, it may be best to make sure there are not too many complaints.

"Increasing oversight can backfire in bureaucracies, because bureaucrats may respond to more supervision by just staying out of trouble," notes Prendergast.

For example, an INS officer could allow an unqualified candidate to enter the country rather than risk being accused of racism, or police officers could choose not to arrest a suspect to avoid charges of wrongful arrest or excessive force.

Relying on consumers is more complicated for bureaucracies, because in contrast to private sector organizations, bureaucracies do not necessarily want consumers to be happy with their decisions. In the private sector, consumer satisfaction is a top priority, and easily measured in surveys, or sales, or stock prices.

"People often suggest exporting private sector solutions to the public sector, but the solutions that work well in the private sector are usually not going to work well in the public sector," says Prendergast.

Examining the LAPD

To put the issue of bureaucratic efficiency into context, Prendergast conducted a follow-up study, "The Response of the LAPD to Increased Oversight." In this study, he examined data on the response of the Los Angeles Police Department (LAPD) to increased bureaucratic oversight since 1998. The change in oversight was partly caused by well-publicized media accounts of infractions by anti-gang squad officers during the mid-1990s, leading to the Rampart Board of Inquiry. The board's recommendations resulted in substantial changes to the department.

After January 1998, the LAPD became more responsive to perceived police infractions by increasing penalties that officers face for wrongdoing. Recent changes have made it easier for consumers to file complaints against the LAPD-for example, complaints can now be filed online. All complaints against officers are now investigated by the Internal Affairs Division.

Throughout the early to mid-1990s, the LAPD typically investigated between 50 and 70 percent of complaints. Since 1998, Internal Affairs has investigated 100 percent of complaints. In 1997, there were 1,912 complaints filed. In 1999, the number of complaints increased to 5,280.

These changes have not been well-received by LAPD officers who perceive themselves at greater risk of suspension and permanent job loss. Between 1992 and 1997, the LAPD fired an average of 13 officers per year for wrongdoing. In 1998, 55 officers were fired, and 44 were fired in 1999. In total, these changes have resulted in over 800 officers being disciplined, 113 officers being terminated, and many others who have left the force rather than face investigation.

To avoid attention, officers are especially likely to change their behavior in cases of "victimless crimes," such as narcotics crimes and prostitution. The number of narcotics arrests declined by 50 percent from 1998 to 2001.

Many of the disciplinary cases involved the use of excessive force. Prendergast suggests that the increased oversight will result in officers being less likely to confront suspects. To see how the oversight changed officer behavior, he gathered data on the frequency of officer-involved shootings. Shootings declined by 45 percent in 1998. Another measure of excessive force is the number of assaults on officers. By the end of 2001, assaults on police officers were down 30 percent from 1997.

Officers used to drive into low-income black and Hispanic neighborhoods and confront suspects, but now there is a danger that they will face an investigation. Prendergast notes that the new strategy of LAPD officers seems to be "drive and wave," whereby officers drive through low-income black and Hispanic neighborhoods, and instead of getting out of their car, they keep driving, essentially avoiding doing their jobs.

"The logic of these officers seems to be that if they don't arrest people, they won't get into trouble," says Prendergast. "As a result, arrests have gone way down and the crime rate has gone way up, because the police have not been confronting criminals."

After many years of decline, gang-related violence in Los Angeles increased significantly between 1999 and 2001. By December 2000, the homicide rate was 143 percent higher than at a comparable time in 1999. Drive-by shootings were up 69 percent. Until 1998, gang-related homicides fell as attacks on officers rose. However, since the change in oversight in 1998, assaults on officers declined while the homicide rate soared to a level not seen since the mid-1990s.

"The changes made after the Rampart inquiry may have been knee-jerk responses," says Prendergast. "There needs to be a middle ground between investigating the officers who are actually guilty of wrongdoing and making sure that the average officer does not find walking away from a suspect too appealing."

Judging Bureaucracies

Ironically, the optimal bureaucracy may involve making sure bureaucrats do not feel too threatened by complaints which highlight their mistakes. Prendergast suggests that bureaucracies lower the temptation for their employees to yield to consumer demands. In order for bureaucrats to truthfully deny goods to consumers, they have to be able to avoid worrying too much about complaints, yet be sufficiently concerned about oversight if they issue goods in an inappropriate manner.

Given the costs associated with increased oversight in these cases, Prendergast recommends that bureaucracies ignore some legitimate complaints, within reason, and pay more attention if there is a noted lack of complaints.

"It's important to give bureaucrats the confidence to know that if they make a consumer unhappy, it will not rebound on them," says Prendergast. "Improving efficiency may mean not listening to consumers as much as you would in the private sector."

Prendergast notes that people who work in the public sector are just as motivated as those in the private sector.

"The sense of doing good that motivates public sector workers such as police officers and social workers may become fragile if they are always treated as the bad guys," says Prendergast. "The things we penalize people for in other settings can erode the bureaucrats' motivation and give them escape hatches."

Prendergast continues, "It's important to respect people like social workers who get paid almost nothing to do extremely stressful, depressing tasks. Bureaucrats are doing the best they can, but the jobs they are being asked to do are very difficult."




Canice Prendergast is W. Allen Wallis Professor of Economics at the University of Chicago Graduate School of Business.
