3.6  Decentralised information, knowledge and relationships

The existence of information asymmetries mean that in some cases decentralised decision-making may enable more timely and better decisions to be made. That is, decentralisation may enable location-specific information, knowledge and relationships to be used to make the best decision. The quality of decision-making may be improved by moving the point of decision-making closer to those affected by it. Those with more accurate and up to date information can respond to client needs more effectively than those at the centre. In this way decentralisation may improve resource allocation in the public sector and better meet client needs. The presence of this “particular” knowledge is a prime rationale for the decentralisation of more responsibility for input choices to Chief Executives and away from central agencies (together with the need to increase accountability, discussed later in the paper).

Through the use of this location-specific information, decentralisation can foster greater diversity and choice, and encourage innovation and flexibility to respond to change. North (1990) notes that decentralised decision-making enables societies to explore alternative ways of solving problems In this way decentralisation may enhance adaptive efficiency and encourage greater innovation. Decentralisation can offer a greater opportunity to customise services and publicly provided goods to specific circumstances. This leads to the rationale, first expressed by Tiebout (1956) that decentralised decision-making enables the diversification and customisation of publicly provided goods and decisions in accordance with “local” preferences.

3.7  Incentive problems

Where location-specific information is required for decision-making this suggests decentralisation. However, this assumes close alignment of the interests of decision-makers at the rim with the objectives of the government (as mandated by voters). Thus, in considering the location of decision-making rights it is important to consider the incentives of decision-makers and whether those incentives can be aligned with policy objectives through mechanisms such as decision makers’ values, inherent incentives, performance monitoring, the desire to maintain reputation, or contractual arrangements (see also the related section later in the paper on decentralisation as a way to reduce the risk of the abuse of power, which discusses incentive problems associated with centralisation).

Decentralisation increases the risk that perverse motivations may be a problem and may increase the difficulty in aligning the interests of decision-makers with the objectives of the democratically elected government. Decentralisation of decision-making is closely related to the notion of giving managers and departments the freedom to manage those things they can manage well and holding them to account (Treasury 1987). This freedom to manage increases the importance of taking steps to ensure incentives are aligned through the use of performance monitoring, the establishment of a code of conduct and greater management of accountability processes by the centre (Aucoin 1995). In this way decentralisation of certain decision-making powers may also lead to an increase in the role of the centre in monitoring performance.

Incentive problems, together with the desire to manage risk, create a pressure to centralise decision-making. However, this may be costly. Centralising decision-making that requires localised information leads to two possible sources of costs: Either, the costs of transferring information (including reducing the likelihood of a timely decision); or, the costs of not transferring the relevant information (poor decisions).

3.8  Diseconomies of scale and scope

Decentralisation can avoid diseconomies of scale and scope. People have limited capacity, limited knowledge and time to acquire and evaluate new information in order to make good decisions (Kasper and Streit 1998). Thus, decentralisation may be used to avoid the concentration of an enormous load of decision-making on a few people and resources at the centre (Gorringe 1996). In some cases, this span of control problem may be able to be solved by shifting decision rights further from the centre, or by shifting decision rights to another agency the same distance from the centre.

3.9  Participation

There may be value in local participation in decision-making, whether or not that in itself leads to better decisions. Local and regional autonomy may be enhanced through decentralised decision-making, thus enabling a greater degree of power sharing, community involvement, and sense of empowerment. For this reason, decentralised decision-making may be more durable even when it is not the most “efficient” option when measured by narrower criteria. Decentralisation can be used to provide a flatter, less hierarchical and more empowering structure. This may lead to greater motivation and job satisfaction due to those further from the centre having a higher degree of freedom, discretion and control over their work (Child 1984).

3.10  Limiting power and providing independence

Decentralisation can also help avoid an unnecessary concentration of power and reduce direct control and dictated direction (at least from the centre). While Parliament (and Ministers) may decide the executive branch of government should undertake a function, they may also decide that it is not appropriate for Ministers or core central bureaucrats to exercise certain decision rights, and may provide a clear commitment to this by providing statutory independence (Tirole 1994). This may involve some decentralising of decision rights from Ministers, at the centre, to other organisations such as Crown Entities or other statutory bodies. In this way decentralisation of decision rights may provide for some separation of powers, thus reducing the risk of abuse of power. This may also be important in signalling independence from Ministers to the public. Providing this credible commitment to independence from political control is not necessarily the same as decentralisation, although it may often be achieved through some decentralisation of decision rights.