Submitted by: Submitted by bokro
Views: 278
Words: 1214
Pages: 5
Category: Business and Industry
Date Submitted: 03/15/2011 06:45 PM
Canice Prendergast
University of Chicago and National Bureau of Economic Research
Bureaucracies tend to be used when consumers cannot be trusted to
choose outcomes efficiently. But a primary means of bureaucratic oversight
is consumer complaints. But this can give bureaucrats an incentive
to inefficiently accede to consumer demands to avoid a complaint.
I show that when this incentive is important, bureaucracies (efficiently)
respond by (i) ignoring legitimate consumer complaints, (ii)
monitoring more in situations in which it is not needed, (iii) delaying
decision making “too long,” and (iv) biasing oversight against consumers.
I also show that bureaucracies are used only when consumers
cannot be trusted. As a result, observed bureaucracies are always
inefficient.
I. Introduction
Bureaucrats pervade economic life. They approve our medical procedures,
process our credit card inquiries, decide whether to arrest and
incarcerate us, issue our licenses, approve our immigration status, schedule
our appointments, and so on. Arguably most economic interactions
that we engage in involve not the canonical buyer-seller relationship of
economic theory, but are instead affected by some intermediary. The
objective of this paper is to better understand agency issues that affect
bureaucratic decision making and to identify the constraints that make
efficiency difficult to attain.
I amgrateful to the editor, Kent Daniel, Lars Stole, two anonymous referees, and seminar
participants at Harvard University, University of Michigan, Bristol University, Duke University,
the Latin American Econometric Society, the Irish Economic Association, and the
Royal Economic Society, Durham, for helpful comments. I would also like to thank the
National Science Foundation and the University of Chicago for generous support. Any
errors are my own.
930 journal of political economy
There are typically two ways to assign goods to consumers: consumer
choice and bureaucratic...