On The Optimal Incentivization of Bureaucracy

Incentives matter. That is how I (and every other economics professor lucky enough to teach principles of economics) begin my classes every year.

Consider these sentences:

The central tasks of a modern state can be placed in three broad categories — maintaining the rule of law, providing public goods to citizens and using fiscal tools to redistribute income.
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An efficient bureaucracy is essential for a successful state.
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The efficacy of a bureaucracy is dependent on the incentives or disincentives that individual civil servants face when they take decisions.

https://www.idfcinstitute.org/knowledge/publications/working-and-briefing-papers/bureaucratic-indecision-and-risk-aversion-in-india/

Bureaucrats, policymakers, students of public policy and us professors should read this excellent paper. But if you are a student of economics, just beginning your journey in the Dark Arts, you should definitely read this paper.

Why? Three main reasons:

1. It is a wonderful way to understand why incentives matter
2. It helps you understand why government offices (and their cousins) function the way they do
3. Trying to understand the Indian economy without understanding this aspect of it is an impossible task.

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The paper is titled “Bureaucratic Indecision and Risk Aversion in India”, and is freely available here. The authors are Sneha P, Neha Sinha, Avanti Durani, Ayush Patel and Ashwin Varghese. It is an extremely accessible paper, in the sense that there are hardly any pre-requisites for you to read it in its entirety, and if you take notes, the paper is guaranteed to leave you with a ton of reading material. All those are the cherries on top: the biggest advantage is that you get a much better understanding of why the Indian bureaucracy is the way it is, and what could be done about it.

Here are my quick reflections after having read the paper:

1. If you are a student reading this paper, you might enjoy encountering prospect theory at the outset. Again, it is a great way to connect the dots between what you learn in a classroom and its real life application. (There’s further reading, if you are so inclined)
2. The second section is (to me) the meat of the paper. The title is “The Causes of Bureaucratic Risk Aversion”, and the authors list out 12 in all. These are grouped under three separate headings. As a mnemonic for myself, I think of them as Structure, Culture and Nurture
   1. Structure is Organizational Design: whether through over-monitoring, not enough discretion being given, an overload of bureaucratic responsibilities, the typical bureaucrat simply doesn’t get the time, the bandwidth or the incentive to not be risk averse. In plain simple English, the authors are saying this: if you or I had been a bureaucrat, we would have done exactly the same things that our bureaucrats have been doing for years. And this is so because like our bureaucrats, we too would have responded rationally to the operating structure we are a part of. It is not the bureaucrats that need to be changed, in other words, it is the organization design of bureaucracy that needs to change. Or that is my understanding of the first half of this section.
      But when it comes to structure, the latter half of this section speaks about the way candidates are selected, about how they are trained and mentored and about how they are (under)paid. Each of these are important to understand, and I especially liked how benchmarking and comparisons were made using examples from Singapore, Malaysia and Indonesia. Speaking of which, please read Gulzar Natarajan on entrepreneurship as a desirable trait in a bureaucrat, and please see this website from Malaysia.
   2. Culture is Institutional Norms and Culture: Please (pretty please!) read the whole section. It is an eye-opener. Plus, it is full of delightful nuggets. For example, I learnt by reading this section that the Official Secrets Act doesn’t define what a secret is, but forbids government employees from revealing them.
      The authors say that accountability to process, rather than outcomes is a problem. Now that gives me a delightful problem to mull over for a long time to come. How to reconcile this point (which is, I think, fair and valid) with this post (which also, I think, is fair and valid? Thoughts and suggestions welcome!
      Shleifer and Vishny (1993) and Becker and Stigler (1974) are two papers cited in the last part of this section, and as a student, they are absolute must-reads.
   3. Finally, Nurture is Political Pressure: This section is about your political boss (or bosses, in some unfortunate cases). Anybody from the corporate world will immediately draw the link between this and the dreaded “dotted line manager”. Similar problem, and similar outcomes.
3. What can (and should) change is what this concluding section is about.
   1. I loved the idea of linking public sector salaries to private sector wage levels (although as statistician I can’t help but think about how that might actually work in India)
   2. The Committees timeline is wonderful for students, in the sense that gives you a quick way to understand what has happened in this space since independence, and the enthu-cutlets can dramatically expand their “To Read” list.

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As additional reading, should you have the appetite for it, here is what I would recommend:

1. All posts tagged “Bureaucracy” from Gulzar Natarajan’s excellent, excellent blog.
2. An old, tangential but delightful read: English August
3. Ch06 of this year’s Economic Survey