Monday, May 17, 2010

Could an incentive plan reduce government waste?

Business historian John Steele Gordon wrote a WSJ op-ed last week advocating financial incentives for government employees to lower operating costs.  As an economist and a government employee (dean is just a nice word for bureaucrat), the subject strikes close to home.  Steele thinks we bureaucrats would much more energetically seek cost savings if our incentives were aligned with the taxpayers.  He cites the example of the British Royal Navy which was charged to keep the seas clear of enemy warships and commerce.  After capturing a vessel, the booty would be split by formula to the admiral (12.5%), captain (25%), commissioned officers (12.5%), senior warrant officers (12.5%), petty officers (12.5%) and crew (25%). 

My reaction: in some cases such incentives would work out well, especially in the purchasing arena.  But I see two big difficulties if this concept were widely applied.  First, incentive plans are difficult to design without creating gaming opportunities.  Expect employees to overestimate costs and then miraculously find cost savings.  Second, customers of government services lack good options in the private sector, so cost savings to benefit employees will trump service quality.  In education there is an easy way to reduce costs: increase class size.  The same principle applies to other government services as well, think how long the lines at the DMV could get. 

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