Prefer Local Government

Government agencies waste money mainly because they are inefficient, not because they are corrupt.  Local governments waste a lot less.  More here:

We analyze procurement purchases by a representative sample of Italian public bodies over the period 2000-2005. Our dataset contains very detailed information on the purchase of 21 generic goods. For each purchase, this includes quantity, brand, model, specifications, delivery conditions, and — most importantly — the price paid. …

The average prices paid by different Italian public bodies vary substantially. The public body at the 90th percentile of the fixed effect distribution pays on average 55% more than the one at the 10th percentile. …

Differences across public bodies are correlated with institutional characteristics rather than geography or size. Semi-autonomous bodies (universities and health authorities) pay the lowest prices. Compared to these, the average town government pays 13% more. The difference increases further for regional governments (21%), social security institutions (22%), while the average ministry tops the list with 40% higher prices. …

At least 82% of estimated waste is passive and that passive waste accounts for the majority of waste in at least 83% of our sample public bodies. …  Overall our findings are consistent with the hypothesis that, in aggregate, most waste in the procurement of generic goods by the Italian public sector is not due to corruption but to inefficiency.

Scale diseconomies appear to be strong in government, as they are in the private sector.

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  • Curt Adams

    I wonder if that applies outside of Italy. It’s interesting that this doesn’t seem to apply generally to health care – Medicare and the VA get very cheap prices, as do national entities in other states. I also wonder if the extremely wasteful expenses for central government agencies is skewed by military spending, which is notoriously wasteful in the US.

    • http://hanson.gmu.edu Robin Hanson

      Have data on inefficient local govt med?

    • Steve

      I wonder if there’s a “sweet spot” for government size. One of the smallest forms of government in the USA is the Home Owner’s Association, and the sheer volume of the abuse anecdotes originating with them approaches the statistically significant.

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  • mikem

    Is it not possible that a lot of this inefficiency is corruption in disguise? i.e. the higher procurement costs are due to the rolling in of the costs for kick-backs to corrupt procurement officials?

    • http://thomblake.com/ Thom Blake

      My intuition goes the other way on that one – I would suppose that the local governments produce less waste because they can be corrupt without going through official channels: protection rackets, extortion, etc.

  • Robert Johnson

    I agree that this seems to be an issue of scale. So, maybe you get a benefit by scaling down government on the federal level, and scaling it up at the local level. Or maybe you don’t. After all, one particular local government will likely replicate a lot of work being done by other local governments around the nation. That’s one reason why large corporations often centralize some functions rather than having each office run it’s own HR department, etc.

  • Jay

    I think that inevitable consequences of scale make up much of the difference.

    A local government does not have to worry about building a bubble in any sector of the economy; usually market participants have enough capacity to meet their demands without building new factories. A local government does not have to worry that, if they order no school buses for 5 years, the bus companies will be bankrupted. If the Navy stops ordering warships for a year, the shipyards close and good luck replacing those skills.

    In general, local governments use microeconomic rules and continent-scale governments use macroeconomic rules. This study may be mistaking macroeconomic constraints for inefficiency.

  • Dylan

    When I deployed to Iraq in September of 2008 I hired a company to store my personal household goods. (I avoided doing this through the Army because of the chance they would take away my housing allowance in lieu of storage; the housing allowance was many times the storage fee.)

    When I received the price quote for monthly storage the employee tried to sell me on the rate with the information that I was paying less than half what they charged the government for the exact same service.

    While there are plausible reasons why such a higher price might be justified (long term high price contracts with variable, unpredictable quantity demanded give the storage company incentive to invest in higher capacity that’s going to be a waste if large scale deployments dry up), it may just be that whoever negotiated this agreement for the government had lower incentives to bargain for the best price. Local government has stronger oversight from local newspapers than mid range federal bureaucrats away from Washington DC.

    • http://pojatitkee.blogspot.com Paavo Ojala

      “it may just be that whoever negotiated this agreement for the government had lower incentives to bargain for the best price”

      Would this apply to town governments vs. regional governments? Town politicians probably has less in the game, than regional politicians. Why would they have higher incentives than career politicians? Of course career politicians might be more corruptible. The higher costs for regional government can’t be the fault of bureaucrats if semiautonomous bodies (run by bureaucrats) have lower costs.

      Maybe it is just that town politicians feel more emotional responsibility to do their best for their neighbours. Regional, national, or federal politicians don’t really have to bear the emotional responsibility, only the political responsibility.

  • A dude

    Last time I looked at my US tax return, about 1/4 of $$ went to the state (CA, not the most efficient, ahem) and 3/4 to the Federal. When I thought about public services I get for that, all of them were state or local (roads, police, etc). Couldn’t identify a single benefit that I derive from the Federal gov’t.

    In that context, I guess I am not very price-sensitive when it comes to Federal spending, as it doesn’t chenge the value I get (zero)

  • Constant

    I don’t really understand this. Price is determined by the market, not by the buyer. Suppose that the town government buys pencils from Staples, and the national government also buys pencils from Staples. How does the national government end up paying more?

    If I were trying to measure government inefficiency, I don’t think I would do it by looking at the prices of goods bought, presumably on the market, presumably at market prices.

    If different levels of government paid different prices for the same goods, then I’m inclined toward mikem’s hypothesis: that somebody somewhere is pocketing the difference who isn’t supposed to.

    • Robert Koslover

      Constant, have you ever sold anything to the federal government? It’s not the seller that is explicitly inefficient; it’s the buyer, who imposes thick bureacratic and legal rules/hurdles upon the seller, which force the price higher so that the seller can recoup the extra costs when selling to the Government! The paperwork to sell a product to the Government is, on average, substantially more complex than to sell that same product to a commercial company, or to an ordinary person on the street.

    • Robert Koslover

      Oh, and I should also add, that even when the direct price is not obviously higher (such as to purchase a stay for a government employee at a hotel room) the Government spends considerable taxpayer money (overhead again!) on processing the paperwork to track and audit the expenses, to refund the individual making the expense, etc. So the taxpayers pay more for that hotel room (occupied by a government employee on travel) than merely the price charged by the hotel, the latter which may be quite reasonable.

  • Robert Koslover

    A related subject is the efficiency of government-contracting. I work for a small government-contracting R&D company. In this business, it is very well-known that small companies generally have lower overhead rates than large companies. I.e., if you (a customer) want to buy, say, 100 hours of a skilled engineer from a large company like Boeing, you really will have to pay more per hour (to the company, not directly to the employee) to obtain that engineer’s labor than you would if you purchased that exact same engineer’s time from a small government contracting company (yes, which could even be paying the engineer the same salary). Overhead rates are inverse to efficiency. So, why don’t large companies have lower overhead rates, due to “economies of scale?” Well, the experimental fact is that they don’t. For whatever reason, in my business, smaller is almost always more efficient (i.e., lower overhead). And this direct experience of mine, gained over the last 22 years, is one of the reasons I prefer (and recommend to others) that any/all tasks be performed by the smallest organizations that can do them! I.e., I assert, more generally, that small organizations (of nearly any kind) are more efficient than larger ones. Please friends, leave only the larger tasks (like building a 747) to the big companies, and leave only the biggest government tasks (like running the DoD) to the Federal Government. Thanks.

  • George

    I guess there’s trade-off between predictable laws and efficient procurement. Personally, I prefer a small but centralised government. That would minimise the waste described here, but still ensure consistent and predictable rules no matter where I travel.

  • Lord

    A question is whether it increases by more than the size of contract. If the size of the contract increases by more than the price, it is a matter of efficiency of purchasing, and it could be more efficient even if the price is higher.

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