4.3.2 Incentives
One way to analyse the issue of subsidiarity and devolution is to focus on the structure of governance, the rights and duties of actors at various nodes within the structure, and principal-agent relationships. Tirole (1994) provides a useful overview of the application of incentive theory to public sector organisations. He begins by discussing the differences between private and public sector organisations and is careful to point out that the differences are in degree and not fundamental in nature.
Government may have a multiplicity of goals. Typically the mandate of government agencies is multi-dimensional. Although multi-dimensionality need not prevent the construction of powerful incentive schemes it does create difficulties. First, some of the dimensions (eg, an indicator of sustainable development) might be hard to measure. A second, and related, difficulty is the relative weights that attach to the multiple goals of the organisation. For example, the RMA requires mitigation of adverse environmental impacts and instructs administrators to consider the costs and benefits of their policies. Setting an incentive scheme would require putting weights on these two measures.
Many government agencies have a monopoly position that can make relative performance hard to measure. At lower levels of government this may not be too difficult provided information is available. For example, a study comparing the cost of consent processing across regional councils should be feasible.
In contrast to a corporation, the goals of an agency are defined by a political process that changes over time reflecting heterogeneity of owners’ tastes. Lack of time consistency may limit commitment possibilities relative to the public sector. For example, bearing in mind the political cycle, what intertemporal commitments are possible if a lower level of government decides to deplete natural capital in expectation that future investment in manufactured capital will occur? Incentives for achieving sustainable development should be related to agency missions.
Monetary incentives exist in government agencies. However, incentives are likely to be low powered rather than formal incentives. By low powered Tirole is suggesting that the agent receives only a small fraction of his or her marginal product. To illustrate, a government official might lead a law reform that enables rights-based management of water resources that unleashes regional economic growth. In the private sector this individual might enjoy a share bonus and other benefits. Not so in the public sector. Existence of low-powered incentives is related to the difficulty of measuring marginal product and the existence of multiple objectives.
An agency with a strong mission will give perfunctory attention to tasks that are not central to that mission. If this observation is correct, then a directive to minimise adverse environmental effects without due consideration of compliance costs will bias resources toward activities that promote the former. This of course raises the issue of where missions come from. The example assumed that they are set externally or self-imposed. While we are in the realm of conjecture, we might also ask whether officials would accept the task of implementing MBIs knowing that they do not have the ability (broadly defined) to succeed.
As mentioned earlier, adverse selection and moral hazard models have been applied to the issue of devolution. When it comes to managing externalities and promoting sustainable development it is highly likely that we face the problem of incomplete contracting. When all contingencies cannot be costlessly included in contracts the allocation of rights plays a role in deciding what to do in unforeseen circumstances. It is more realistic to view government in terms of the distribution of control rights over various kinds of decisions (Tirole, 1994).
Continuing with the idea of control rights we can consider these within the architecture of governance. In New Zealand the architecture of governance is an external institution where control is determined by parliament. Figure 13 provides a stylised view of two alternative architectures for sustainable development. Sustainable development is shown as an overarching goal. Numerous configurations are possible but let us look at the following two possibilities. Sustainable development requires both vertical and horizontal coordination. Alternative A shows central government ministries implementing MBIs that may or may not be differentiated across regions. Alternative B shows the responsibility for introducing MBIs devolved to regional/local units of government. Issues of efficient governance and incentives vis-à-vis achieving sustainable development can be assessed empirically within this architecture.
