Improving the Efficiency and Responsiveness of the Public Sector Joseph Stiglitz Columbia University

Is government less efficient? Mixed empirical results

Why might government be expected to be less efficient, private sector to be more efficient? Better incentives –But in most large corporations/organizations incentives are limited –Inherent problem in teams and administrative work (where outputs are hard to observe) –Managers (in both public and private sectors) can undertake actions which increase their autonomy, their discretion to pursue own interests Take-over mechanism ensures that management teams that do not maximize market value are replaced (competition in the market for managers) –Take-over mechanism works (in practice and in theory) very imperfectly

Government faces same information constraints as private sector, so even if imperfect information leads to market failures, it does not imply that there is a role for government Information problems give rise to externality-like effects, and governments—facing identical information constraints can improve welfare, e.g. through corrective taxation But government has powers that the private sector does not have Unique organization with powers of compulsion (proscription)—necessary for addressing free rider problems

Government powers give rise to its limitations Fears that government will abuse its powers give rise to constraints –Equity constraints –Civil service –Procedural constraints These constraints limit incentives Limitations on “upside” potential contributes to risk averse behavior

Other government limitations Governments enforce commitments of the private sector Each government is sovereign Government difficulties imposing hard budget constraints

Some commonly observed differences between government and the private sector are, at least partially, self inflicted Competition Lack of sensitivity to customers

Government advantages over the private sector Importance of intrinsic rewards Bureaucratic processes sometimes interfere with ability to receive full benefits

Re-inventing government Making government more efficient and more responsive –Using market like mechanisms –Incentives –Competition –Consumer monitoring –Organizational design—decentralization, debureacratization, corporatization Designing policies and institutions to reduce rent-seeking and corruption –Corruption resistant tax policies –Use of new technologies Redefining the relationship between government and the private sector –Partnership/complementarities –Recognizing strengths, limitations of each

Third Way Strategies for creating a better society with more social justice Third way between extremes of laissez faire economics and government domination Government plays an important but limited role