Why Bureaucrats don't Maximize their Budgets
When I first read the argument it struck me that it contained a fundamental mistake. So far as I can remember, I never published that conclusion. I recently came across a version of Niskanen's argument in an online discussion, so thought I might as well take the opportunity to explain why it is wrong.
Consider two bureaucrats. Abe has a ten million dollar budget and is required to purchase $9,900,000 worth of paper to be sent to the IRS for printing tax forms on, leaving him $100,000 for himself, his secretary, and rent for his office. Bernie has a one million dollar budget and is required to do nothing at all. Which would you rather be?
Generalizing the example, I suggest that the size of the budget in Niskanen's model ought to be replaced with the surplus, defined as the difference between the size of the budget and the lowest cost at which the output the bureau has agreed to can be produced. That difference represents resources that bureaucrats can divert to their own purposes.
I'm curious. Niskanen's book was published a long time ago. Have other people proposed the same modification?