[PEN-L:2284] Re: Shleifer and Incentives

[Brad De Long <delong@xxxxxxxxxxxxxxxxx>]

>Peter Dorman wrote:
>
>>
>>
>>   ------------------------------------------------------------------------
>>
>> Subject: Shleifer and incentives
>> Date: Fri, 15 Jan 1999 13:12:03 -0800
>> From: Peter Dorman <dormanp@xxxxxxxxxxxxxxxxxxx>
>> Reply-To: pen-l@xxxxxxxxxxxxxxxx
>> References: <001501be3fd1$f6c56940$3bf246d1@xxxxxxxxxxxxxxxx>
>>
>> I finally got around to reading Andrei Shleifer's rant against the
>> public sector in the Fall 98 J of Econ Perspectives.  For those of you
>> who haven't looked at it (and I can understand why), Shleifer argues
>> that contract theory (post Williamson and Hart) supports the idea that
>> almost any good or service can be provided more efficiently by the
>> private sector.  He even concludes with a brief, superficial plug for
>> educational vouchers.  He does not appear to recognize that his entire
>> approach begs the question by assuming that all workers, whether
>> publicly or privately employed, are opportunistic and self-interested,
>> and that only competition and/or incentive-compatible contracts can
>> light a fire under them.  This is equivalent to denying the existence of
>> public service motives.  Clearly, without an ethos of public service,
>> government becomes stultifying and tyrranical.  A rational research
>> agenda would look for the circumstances under which public service
>> flourishes or withers.
>>
>> But I'm not getting to the point.  What I found utterly surreal about
>> this article is that its author is under a cloud for having personally
>> misappropriated public funds.  So he is really modeling himself, and his
>> own crass opportunism.
>>
>> What is the current status of the charges against Shleifer?  As I
>> recall, USAID cancelled its contract with his unit at Harvard and
>> initiated legal action.  Is the action still pending?  Does anyone out
>> there have more information on this case?  And why would JEP print an
>> article on this topic by someone in Shleifer's situation?
>>
>> Peter Dorman


Well, as the co-editor of the _JEP_ who agreed with associate editor Oliver
Hart's decision that Andrei Shleifer would be an interesting person to
write about the public sector (and as an ex-college-roommate of Andrei
Shleifer's as well), let me say three things:

First, Andrei's major goal--at least as I understood the paper that I
edited, and if it didn't come through in the published version then I
messed up--was to try to break the link between the case for social
democracy (in the sense of substantial redistribution of income and wealth
and substantial goverment funding of education, infrastructure development
and so forth) and the case for the public provision (in the sense of the
government itself employing a lot of people and managing a lot of
production). As Andrei put it to me the first time we talked about the
paper, we don't have the government try to raise nutritional standards for
the poor by hiring people to grow wheat on state farms which is then
processed in state mills, baked in state bakeries, and then distributed
through state warehouses--instead we have food stamps. And he (and I)
suspect that food stamps are more effective than the state-run agricultural
and nutritional center will be.

Second, Andrei's secondary goal was to explore the limitations of the
traditional arguments against trying to harness the market to produce
public and publicly-funded goods. The traditional argument--half of which
is well-expressed by Peter Dorman--is that there is a lot of energy to be
harnessed by appealing to an ethos of public service, and there are lots of
times when you definitely do *not* want "hard incentives" because they
create enormous pressure to cut the quality of the service. When the
service would be produced by a natural or artificial monopoly, when
consumers would for some reason be unable to vote-with -their-feet for an
alternative provider (Andrei is especially scornful of proposals to
"privatize" prisons), or when citizens are simply unable to judge the
quality of the service, then you definitely do *not* want the service
provided by the government handing out vouchers for citizens to use to buy
it from profit-seeking firms.

But--and this is where I think Andrei's argument is especially interesting,
even though I am not sure that it is true--in almost every case in which
you want "soft incentives" and to harness an ethos of public service, you
will find that you would prefer to have the process of production and
service delivery performed by a dedicated non-profit enterprise rather than
by the government at large. The government at large is likely to be too
interested in cutting corners to save money to provide tax cuts, or too
interested in making sure that the people employed are those who worked for
the winning candidate in the last election.

Non-profit enterprises, Andrei thinks, allow you to have all of the
benefits of government operation--ethos of public service, no strong
financial incentive to cheat the public, responsiveness to democratic
politics in the sense that the government directs the spending by providing
the vouchers--and some of the benefits of market provision as well: the
potential for competition, and a certain degree of insulation from machine
politics and rent-seeking corruption.

In short, better to have the Red Cross than to have Ed Meese running the
Federal Blood Collection Administration.

Andrei's view depends on a particular neo-liberal conception of politics
and government. But it is not clear to me that such a neo-liberal
conception of politics and government is false. After all, Karl Marx had
some things to say about how state powers of command and control would be
exercised as human progress continued...

Third, as I understand it at least, Jon Hay is under a cloud for
"personally misappropriat[ing] public funds"--he appears to have let his
girlfriend use an empty desk (and a telephone) at a Moscow think-tank he
ran to start her mutual fund, and that Moscow think-tank [ILBE] was
partially funded by USAID. Jon Hay is in big trouble. USAID's complaint
against Andrei Shleifer is harder to figure out, and I have not been able
to do so--after the completion of the World Bank audit it certainly does
not seem to be that USAID money wound up in his pocket...

As to why we printed an article by him, it is because he seemed to have an
interesting perspective to offer: that the right way to organize modern
social democracies is to have public funding (of redistributional
expenditures, public goods, and other socially-valuable goods and
services), but to have private provision wherever we trust citizens'
abilities to judge the quality of what they are receiving, and non-profit
provision wherever we think that we need to guard against the strong
temptation profit-seeking providers have to cut quality where they think it
won't be noticed...


Brad DeLong


-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
"Now 'in the long run' this [way of summarizing the quantity theory of
money] is probably true.... But this
long run is a misleading guide to current affairs. **In the long run** we
are all dead.  Economists set themselves too easy, too useless a task if in
tempestuous seasons they can only tell us that when the storm is long past
the ocean is flat again."

--J.M. Keynes
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
J. Bradford De Long; Professor of Economics, U.C. Berkeley;
Co-Editor, Journal of Economic Perspectives.
Dept. of Economics, U.C. Berkeley, #3880
Berkeley, CA 94720-3880
(510) 643-4027; (925) 283-2709 phones
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