Controllership in The Public Sector 3323261

Association for Public Policy Analysis and Management
Controllership in the Public Sector

Author(s): Fred Thompson and L. R. Jones
Source: Journal of Policy Analysis and Management, Vol. 5, No. 3 (Spring, 1986), pp. 547-571
Published by: Wiley on behalf of Association for Public Policy Analysis and Management
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Controllership in F
the PublicSector* Fred Thone
Ineffective or incompetentcontrollershipis, perhaps, the most

common managerialfailure found in the public sector. This
failure affects outcomes and achievements in everyarea of public
policy-often profoundly.Controllersdesign and operate
control systems. The effectivenessof alternative
Abstract management
control system designs dependsupon the cost and production
behavior of the good or service in question. But control strategies
are seldom consciously or effectivelymatched to circumstances.
As a consequence, public programs are too often simultaneously
overcontrolledand out of control.
Central control agencies perform two distinct functions on be-

half of their principals in the executive and legislative branches of
government: program analysis and controllership.1 Program anal-
ysis supports budget formulation, preparation, and enactment.
Program analysts provide information about programs, the qual-
ity and price of the goods and services produced by governmental
departments and contractors, and the effectiveness with which
services are delivered to clients and to the citizenry at large. They
provide this information to "customers," elected officials in the
legislative and executive branches of government who must decide
which goods and services to buy with public monies.2 In contrast,
controllership is oriented to budget execution. Controllers "design
and operate management control systems."3
Students of public finance have paid considerable attention to
budget formulation, but have generally ignored budget execution.4
The reasons for this oversight are understandable: government
budgets are formulated in public and the issues debated during
this stage of the public spending process are dramatic and crucial.
* The authors wish to thank T.

Borcherding, P. deLeon, E. Littrell, M. O'Hara, A.
Wildavsky, and R. Wintrobe for their comments on drafts of the manuscript. All
correspondence regarding this essay should be directed to Fred Thompson, P.O.
Box 99, Shady Cove, OR 97539.
Journal of Policy Analysis and Management, Vol. 5, No. 3, 547-571 (1986)

? 1986 by the Association for Public Policy Analysis and Management
Published by John Wiley & Sons, Inc. CCC0276-8739/86/020547-25$04.00

548 Controllershipin thePublicSector
On the other hand, budgets are executed in private, and the issues
raised in their execution are often mundane. Because of this selec-
tive attention, both observers and participants in the public spend-
ing process understand program analysis far better than control-
lership. Consequently, the conduct of program analysis has come
to be guided by a fairly coherent set of professional standards; that
is, we can generally agree on what is good analysis and what is not,
just as we can generally agree on what is good accounting practice
and what is not. Although the design and operation of control
systems can profoundly influence governmental performance, con-
trollership is not similarly guided by a coherent set of professional
standards. Without appropriate performance standards, budget
officers cannot be and are not held accountable for their perfor-
mance of this function. Consequently, control systems are not de-
signed to optimize the quality, quantity, and price of goods and
services purchased with public money, but "to facilitate the con-
troller's [other] work."5
This situation is not due to the lack of positive theory. There is a
rich theoretical literature on the design and operation of control
systems. Rather, the problem is that the existing theoretical litera-
ture has not been organized so as to provide practical, normative
standards to guide the conduct and evaluation of controllership.
This is, in part, the aim of our essay: specification of the standards
that should govern controllership, at least in a preliminary way, in
the hope that our work will stimulate additional thinking and
research on the question of public sector controllership.
Control systems design and implementation is a ubiquitous prob-

ALTERNATIVE
lem. It is encountered by all kinds of planners and regulators as
SYSTEM
CONTROL
well as financial controllers. The purpose of various control sys-
DESIGNS
tems differ, as do the details of their execution, but all control
system designers face the same key choices: what, where, who, and
when to control.
If one grants that the goal of financial controllership ought to be
getting the best bundle of goods and services purchased with pub-
lic monies, the choice of what and where to control is fairly obvi-
ous. Financial controllers should be (and are) primarily concerned
with the operating behavior of service suppliers, the efficiency
with which service suppliers produce goods and services, and ulti-
mately, therefore, with the efficiency with which they use their
assets.
The choice of whom to subject to controls and when to execute
those controls is less obvious. In the abstract, the control system
designer has four options. In the first place, the subject may be
either an organization or an individual. In the second, controls
may be executed before or after the subject acts-we will refer to
the former as ex ante and the latter as ex post controls.6 Ex ante
controls are intended to prevent subjects from doing bad things or
to compel them to do good things and necessarily take the form of
authoritative commands or rules that specify what the subject

Controllershipin the Public Sector 549
must do, may do, and must not do. Subjects are held responsible
for complying with these commands and the controller attempts
to monitor and enforce compliance with them. In contrast, ex post
controls are executed after the subject decides on and carries out a
course of action and, therefore, after some of the consequences of
the subject's decisions are known. Because bad decisions cannot be
undone after they are carried out, ex post controls are intended to
motivate subjects to make good decisions. Hence subjects are held
responsible for the consequences of their decisions and the control-
ler attempts to monitor those consequences and rewards or sanc-
tions subjects accordingly. Combining these options, we find that
the control system designer must choose between four distinct
design alternatives: individual responsibility, ex ante or ex post,
and organizational responsibility, ex ante or ex post. We will try to
explain the significance of this choice, its relevance to financial
controllership, and the economic logic that should guide it.
Its significance is partially reflected in the debate now raging
over the merits of privatization. Proponents argue that choices
must be made between provision by rule-governed public monopo-
lies and provision by competing private firms and conclude that
the latter will usually be more efficient than the former. Indeed,
because the choice that the proponents of privatization pose re-
solves to a question of monopoly or competition, it may be inferred
that provision by competing private firms will always be more
efficient than provision by a public monopoly, except possibly
where production of the good or service in question is character-
ized by decreasing costs to scale.
If the distinction drawn by proponents of privatization between
provision by a public agency and provision by a private entity fully
captured the range of choices available to the control system de-
signer and reflected all of the factors relevant to his or her choice,
we would have little to contribute to this debate. However, it does
not. From the standpoint of public controllership, the distinction
drawn between public and private provision is overly simplistic.
First, while it is true that most goods and services purchased
with public money are produced by organizations and not individ-
uals, effective control presumes individual responsibility and ac-
countability. The public-private distinction ignores the financial
controller's capacity to hold managers of public organizations
within his jurisdiction directly responsible for their behavior and,
thereby, the financial controller's capacity to influence directly the
rewards and sanctions accruing to those individuals-salary, op-
portunities for advancement, etc. The financial controller cannot
have this capacity where his relationship to the supplying organi-
zation is at "arm's length" and individual responsibility is "veiled
by the organizational form." The only way an organization can be
rewarded (punished) is by increasing (reducing) its revenues,
which may influence the individual manager's welfare, but only
indirectly. The difference between holding individuals and organi-
zations accountable or between direct influence and indirect influ-
ence is illustrated by the following example: if the quality of ser-

vices supplied by a public agency is grossly unsatisfactory, the

controller can recommend the dismissal of the agency manager;
where government has an arm's-lengthrelationship with a service
supplier and the relationship is unsatisfactory, all the controller
can do is recommend termination of the relationship. That is, the
controller can "punish" the supplying organization, but cannot
"punish" the manager responsible for the "organization's" fail-
ure-although his actions might very well lead the organization's
board of directors to do so.7
Unfortunately, punishing a monopoly can be likened to cutting
off your nose to spite your face; rewarding one, eating an eclair to
celebrate staying on a diet. Consequently, where the supplying
organization is a monopoly, the capacity to influence managers
directly will have considerable utility, particularly insofar as the
controller can stimulate and exploit competition between alterna-
tive management teams. This fact can be verified by reference to
the private sector, where most real "natural monopolies" produce
intermediate products and where their existence usually inspires a
process called vertical integration ("backward"if initiated by the
final goods producer, "forward" if initiated by the intermediate
goods producer), presumably because of the benefits that result
from substituting direct for indirect influence.
Second, the public-private distinction implies that responsibil-
ity can be vested in organizations if and only if the organization is
private, and can be vested in individuals if and only if the organi-
zation is public. But these implications are consistent with neither
theory nor practice. For example, many state legislatures base
their relationships with public entities such as universities or hos-
pitals on self-denying ordinances that exempt their managers from
detailed oversight and direct control. Similarly, the recent General
Dynamics case shows that the managers of private entities supply-
ing services to or for the government can, in certain instances, be
held directly responsible for their behavior.
Finally, most of the proponents of privatization implicitly pre-
sume that the services provided to or for government are homoge-
neous or fungible, which implies that the problem of identifying
the most efficient supplying organization or management team
resolves to a simple question of price search, an elementary con-
trol mechanism that reveals information about the "customer's"
demand for the service. In fact, many of the organizations supply-
ing goods or services to or for government supply bundles of more
or less heterogeneous products-many of these products are hard
to measure and costly to evaluate, some prohibitively so.
The most significant, unexceptionable claim made by propo-
nents of privatization is that control system design should depend
on the cost and production behavior of the good or service in ques-
tion. Unfortunately, they all too frequently fail to carry this claim
to its logical conclusion. Accordingto the economic theory of orga-
nization,8 at least two factors are relevant to the choice of control
system designs: the ease with which the consequences of operating
decisions (that is, an organization or responsibility center's out-

Table 1. The microeconomics of control system design.
COST
OUTPUTS Decreasing Increasing
Unique Individual Organizational
Responsibility/ Responsibility/
Ex Ante Controls Ex Ante Controls
Homogeneous Individual Organizational

Responsibility/ Responsibility/
Ex Post Controls Ex Post Controls
put) can be monitored and the desirability of interorganizational

competition. According to this theory, where consequences are
easily monitored, control should focus on the consequences of the
subject's decisions; where they are not, control should focus on
their content. Because consequences are easily monitored where
entities produce homogeneous outputs or where a responsibility
center within an entity performs fungible activities, the implica-
tion of this line of reasoning is that controllers should rely on ex
post controls where homogeneous outputs are supplied and ex ante
controls where each item supplied is, from the government "cus-
tomer's" perspective, intrinsically unique. Furthermore, accord-
ing to this theory, interorganizational competition is desirable
only where costs are constant or increasing as quantity of output
(rate or volume) increases. Where costs decrease as output is in-
creased, monopoly supply is appropriate. Because responsibility
can be effectively vested in organizations only where customers or
their agents are indifferent to the survival of one or more of the
supplying organizations, the implication of this line of reasoning is
that controllers should vest responsibility in organizations only
where interorganizational competition is possible and likely to be
effective-and in individuals where it is not.9 These normative
prescriptions are summarized in Table 1.
OF These four basic control system designs are widely employed in

EXECUTION
the public sector. The question is, does their use fully exploit the
ALTERNATIVE
CONTROLSYSTEMprinciple of comparative advantage; or, to put it another way, is
DESIGNSeach appropriately employed? Before we can answer this question,
we must first show how these designs are used and explain the
practical logic of their implementation. Our discussion will con-
centrate on the use of ex ante controls. This does not mean that we
particularly like ex ante controls; generally speaking we believe
that controllers should resort to these designs only where the be-
havior of the good or service purchased with public money makes
their use the least-worst alternative available. But the logic of ex
post control is widely understood and appreciated by policy ana-
lysts, although perhaps not by public-sector budget officials; the

logic of ex ante control is not. Presumably it will be more useful to

explain what is not well understood than to explain what is.
ExPostControlEx post financial controls are demand-revealingmechanisms. They
SystemDesigns are executed after operating decisions have been made, that is,
after asset acquisition and use decisions have been carried out and
output levels monitored. Their subject may be either a freestand-
ing organization, such as a private contractor or a quasi-indepen-
dent public entity, or an individual who is nominally subordinate
to the controller, such as a responsibility center manager within a
government agency.
In the first case, the structure of authority and responsibility
within the organization is assumed to be a purely internal matter.
The controller merely establishes a price schedule and specifies
minimum service quality standards (or a process whereby these
standards are to be determined).This price schedule may entail all
sorts of complex arrangements, including, for example, rate, vol-
ume, and mix adjustments and default penalties. Where one orga-
nization can efficiently supply the entire market, the controller
may grant it an exclusive franchise-garbage collection for a small
town or neighborhood is an example. The significant characteristic
of this design is that a per-unit price schedule is announced and
remains in effect for a specified time period.10This means, among
other things, that government's financial liability will depend on
the quantity of service actually provided and not on the costs in-
curred by the organizations supplying the service.
Where this control system design is employed-where a munici-
pality purchases gasoline at the spot-market price, where states
commit themselves to pay freestanding organizations a fixed price
for performing a specific service such as enrolling full-time-equiva-
lent students or treating heart attacks, or where the Air Force buys
F-16s for a fixed price of $11.5 million each-the controller must
rely upon interorganizational competition to provide sufficient in-
centives to service suppliers to produce efficiently and therefore to
make wise asset acquisition and use decisions. If interorganiza-
tional competition is effective, those that don't will fall by the
wayside.
However, even where the cost behavior of the service in question
renders monopoly supply appropriate, ex post controls can still be
effectively employed. This is done in businesses and businesslike
public sector organizations by holding a manager responsible for
optimizing a single criterion value, subject to a set of specified
constraints.11For example, the manager of a cost center will usu-
ally be given the authority to make spending decisions-to acquire
and use assets, subject to exogenously determined constraints on
the quality and quantity of output-and be held responsible for
minimizing costs. Most large firms produce comprehensive operat-
ing reports describing the performance of responsibility centers
and programs, but their budgets seldom need to be very detailed.
The logic of ex post control holds that the purpose of the budget is
to establish performance targets that are high enough to elicit

from the organization's managers their best efforts. Conceivably,

such budgets could contain only a single number for each responsi-
bility center-an output quota, a unit-cost standard, a profit or
return-on-investment target.
Under this control system design, the structure of authority and
responsibility within the organization is of crucial interest to the
financial controller. The effectiveness of this design depends on the
elaboration of well-defined objectives, accurate and timely report-
ing of performance in terms of those objectives, and careful match-
ing of spending authority and responsibility. Furthermore, its ef-
fectiveness will depend upon the clarity with which individual
reward schedules are communicated to responsibility center man-
agers and the degree of competition between alternative manage-
ment teams. Finally, under this design, the financial liability of
government will depend upon the costs incurred providing the
service and not merely on the quantity or quality of the service
provided.
ExAnteControlEx ante financial controls are demand-concealing mechanisms,
SystemDesigns Their distinguishing attribute is that the controller retains the
authority to make (or exercise prior review of) spending deci-
sions-although those decisions may be implemented by either a
freestanding organization or by a nominal subordinate. That is, ex
ante financial controls are executed before public money is obli-
gated or spent and govern the service supplier's acquisition and
use of both short-term and long-term assets. Examples of ex ante
financial controls include not only object-of-expenditure appropri-
ations, apportionments, position controls, and fund and account
controls that regulate the rate and kind of assets that can be ac-
quired by governmental departments and agencies, but also simi-
lar rules that govern the behavior of private entities that supply
services to or for governments.
Execution of these controls requires consideration of the conse-
quences of asset acquisition decisions. This consideration may be
implicit, as it is in the execution of the traditional line-item budget
and basic-research contracts, or explicit, as in the execution of
performance and program budgets and systems development con-
tracts. It is often influenced by information on current and past
performance, but consideration of the consequences of spending
decisions is always prospective in nature.
The logic of ex ante control holds that constraining managerial
discretion is the first purpose of budget execution. Because the
degree of constraint will depend upon the detail of the spending
plan, as well as the degree of compliance enforced by the control-
lers, these budgets need to be highly detailed. For example, a de-
partment or agency's budget should identify all the asset acquisi-
tions to be executed during the fiscal year, specify their
magnitudes, and make it clear who is responsible for implement-
ing each of them.
Furthermore, under these control system designs, supplying or-
ganizations must be guaranteed an allotment of funds in return for

554 in thePublicSector
Controllership
continuously providing a service for a specified period. In both

cases, the service provider will assume some responsibility for
managing output levels or delivery schedules, service quality, or
price to the government customer. And in both cases, government
is directly responsible for all legitimate costs incurred in the deliv-
ery of services, regardless of the actual quantity or quality of the
services provided.
Of course, students of government will recognize that the combi-
nation of ex ante controls and individual responsibility is the con-
trol system design familiar to public sector budget officers as the
lump-sum annual appropriation or grant; most will recognize the
combination of ex ante controls and organizational responsibility
as the flexible-price,cost-plus, or administered contract-this con-
trol system design characterizes well over half of the arm's-length
contractual relationships entered into by the federal government
and is also widely employed by state and local social service agen-
cies to control the behavior of freestanding service providers.
Clearly,if constraining managerial discretion were the sole func-
tion of these control system designs, it would be difficult for us to
argue that they ever represented a least-worst alternative, let
alone explain their widespread use. Consequently, our discussion
will benefit from outlining in greater detail the logic of employing
each of them: first the flexible-priceor administered contract'2and
then the lump-sum appropriation or grant.
Policy analysts usually appreciate the logic of interorganiza-
tional competition and recognize that it may be relied upon to
provide sufficient incentives to service providers to achieve least-
cost operations. They may not appreciate the difference in the role
played by competition under a per-unit price schedule and a flexi-
ble-price contract. Under flexible-price contacts, where organiza-
tions are permitted to compete, they compete for the sole right to
deliver a unique service. That is, competition, if it takes place at
all, always takes place prior to the production of the service in
question. (Economists refer to such a competitive regime as com-
petition for the market to distinguish it from competition in the
market.)
In this instance, the logic of granting a single supplier an exclu-
sive franchise is quite straightforward. Because the supplier will
produce the service for only one customer, in this case the govern-
ment, no freestanding organization would assume responsibility
for providing a unique service without prior guarantee of reward.
Further, it may be presumed that one organization will be best
qualified to provide a specialized service, so that the controllers'
first objective should be the identification of the most competent
service supplier. This usually involves the evaluation of an array of
proposals or bids submitted by organizations interested in supply-
ing the service.
If controllers know precisely what their principals want and if
potential service suppliers know how to meet those preferences,
competitors' proposals can be satisfactorily evaluated on the basis
of service quality attributes offered, promised delivery schedule,

and asking price. In this case, a fixed-price contract should be

employed.
However, in many cases neither the controller nor the service
supplier will possess sufficient knowledge of the value of service
attributes or of the production process prior to performance of the
contract. Considerable experience is usually required to manage to
a narrow range of outcomes; where specialized services are in-
volved, no organization may have the requisite experience. An or-
ganization that agreed to produce a unique service according to a
specified schedule at a fixed price would, therefore, assume a large
financial risk. This risk can be shifted, but it can't be made to
disappear. Because government can often bear such risks better
than supplying organizations (this is always the case where the
federal government is concerned, because of the size of the assets it
commands and its ability to pool risks), the cost of the service to
government will often be lower if government assumes all or a
portion of the risk associated with acquisition of the service. Flexi-
ble or retrospective pricing is simply one way for government to
assume this risk. Further, the preferences of the controller's princi-
pals may change during performance of a contract. Under a fixed-
price contract, it would not be possible to secure desired changes
in service attributes if they involved increased costs for the provid-
ing organization.
Circumstances may thus dictate the use of flexible-price con-
tracts. Unfortunately, once such a contract is signed, the normal
incentives to least-cost production largely disappear. Decisions
that affect cost, service quality, or price (i.e., asset acquisition and
use decisions) must be made during performance of the contract,
but once the contract is signed, the service provider can no longer
be trusted to make efficient choices. Consequently, to prevent bad
decisions, service providers must be denied some managerial dis-
cretion. This is, of course, precisely what ex ante controls do: in this
instance, a fully specified project budget detailing work to be per-
formed, personnel, material, and equipment to be used, input
quality standards, and scheduled milestones. But ex ante controls
are not merely intended to prevent bad things from happening;
they also provide a basis for the enforcement of efficiency through
bargaining and negotiations carried on during the performance of
a contract.
The bargaining process may be thought of as a repetitive two-
party nonzero-sum game, in which both parties have a common
interest in reaching agreement but also have antagonistic interests
with respect to the content of agreements.13In this game, the "cus-
tomer" tries to get as much of what he wants as he can at a given
price, and the supplier tries to provide a given level of service for
the highest possible price. The relative bargaining power in a two-
party nonzero-sum game will largely depend on the information
available to each party. In particular, the customer's power is
greatest where the customer (or his agent) knows the supplier's
true cost schedule, but can withhold full information as to his
preference or demand schedule.14

Controllership
Given comprehensive ex ante controls, under which changes can

be made only with the prior approval of the other party or his
agent, the party suggesting or initiating a change must necessarily
reveal valuable information to the other. This can work to the
advantage of the " customer" or the supplier, or both. For exam-
ple, consider the following situation:
. . contracts and specifications are drawn for ... a ship and agreed to.
. . .The contractordiscovershe can do the weldingof some plates less
expensivelyby anothermeans.Aboutthat time the client decides that
some room on the ship should be larger. ... The contractor can plead
that he cannoteasily changethe room size; however,if the client will
permitthe alteredweldingmaybea deal can be struck.15
But when flexible-price contracting is appropriately employed,
there is every reason to believe that most change proposals will be
initiated by the service supplier. In the first place, prior to the
performanceof a contract, the controller may be somewhat uncer-
tain about his or her principal's preferences, and potential service
suppliers may be uncertain about their capacity to manage to fixed
cost, quality, and schedule targets. This means that changes in-
volving trade-offs will tend to be more valuable to the service
supplier than to the "customer."16Second, competition for the
market, together with retrospective pricing, provides an incentive
to potential service suppliers to promise more than they can de-
liver, because contracts are awarded to the service suppliers who
promise the most. Consequently, very few contract winners can
make good on all their promises, especially where their manage-
rial discretion is severely restricted by a full set of ex ante controls.
This fact will usually become evident to the service supplier
during performance of the contract. The service supplier will also
learn of the trade-offs between cost, service quality, and delivery
schedule available to it and will eventually want to (or in some
cases have to) change its promises or its plans. But under a full set
of ex ante controls, such changes are contingent upon prior ap-
proval. To secure that approval the service supplier must reveal
information about its preferences,capabilities, and trade-offpossi-
bilities. As a result, power to enforce the preferences of elected
officials is passed to the controller.
A similar logic applies where lump-sum appropriations or
grants have a comparative advantage-under decreasing costs to
scale, given unique outputs. For example, lump-sum appropria-
tions appear to be highly effective where substantial fixed facilities
are required to provide services, when each problem, client, or
task performed by the service provider is in some sense unique,
and when the most serious problems are supposed to be dealt with
first. Many organizational units in government supply heteroge-
nous, hard-to-define, and nearly impossible-to-measure outputs.
As Fred Thompson and William Zumeta observe:
Such bureausseem alwaysto be nearthe beginningor end of a compre-

in thePublicSector
Controllership 557
hensivedismantlingand restructuringsince thereis usuallya sense that

performanceis not all that it mightbe. Theperformanceof such bureaus
can only be improvedby budgetaugmentation.And,of course,there are
no guaranteesin budgetaugmentationalone.17
Under this control system design, the controller retains the au-
thority to make all significant operating decisions. Presumably,
therefore, he would like to have as much information as possible
on alternatives and their consequences. That is, the controller
would like the service supplier to reveal a comprehensive menu of
all possible actions and a price list identifying the minimum cost
of performing each action under every possible contingency. But if
wishes were horses, beggars would ride. There is no way to compel
the manager of a responsibility center within an organization to
reveal his unit's true production function-even if he knows what
it is (and, in most cases, he won't). Consequently, the controller
must settle for a practical approximation of this ideal.
Here too, the controller's authority provides a basis for the en-
forcement of efficiency through bargaining carried on during the
execution of the budget. As a result, his principals' preferences
may be approximated, if not fully satisfied. That is, over time, the
supplying organization may be compelled to address the "most
important" problems and to address these problems at a reason-
able cost. The more pressured the unit, the faster the movement.
And here too, the impetus for change must come from the oper-
ating manager. That is, the responsibility center manager must
have an interest in increasing his budget. Otherwise he will be
indifferent to circumstances in which low priority problems drain
resources from problems that are of greater importance to nomi-
nal superiors or legislative sponsors. And here too, a full set of ex
ante controls must be in place. At a minimum this means that
controllers must specify when, how, and where assets are to be
employed and how much the subordinate can pay for them. In
addition, money saved during the budget period from substituting
less costly or more productive assets for more costly or less pro-
ductive assets must revert to the treasury. Money lost in failed
attempts to improve operations must be found elsewhere, and new
initiatives requiring the acquisition of additional assets or reallo-
cation of existing assets must be justified accordingly. These con-
straints are necessary not only because they prevent the manager
from overstating asset requirements in high priority areas to get
resources for use elsewhere, thereby creating a precedent for
higher levels of support in the lower priority area, but also to force
the subordinate manager to seek authorization to make changes in
spending plans and, therefore, to reveal hidden preferences, capa-
bilities, and trade-off possibilities.18
Where a budget maximizer is subject to tight ex ante controls,
the controller can enforce efficiency during the budget period by
requiring affirmative answers to the following questions: Will a
proposed change permit the same activity to be carried out at

lower cost? Will higher priority activities be carried out at the

same cost? Will proposed asset acquisitions or reallocations of
savings support activities that have lower priority than those pres-
ently carried out? When operating managers know and under-
stand these criteria, the controllers will approve most changes in
spending plans proposed by operating managers, that is, only mu-
tually advantageous changes will be proposed.
But to say that when lump-sum appropriations or grants have a
comparative advantage, ex ante controls are a necessary means of
reinforcing the controllers' bargaining power, is not to say that ex
ante controls must be directly administered by the controllers.
Under certain conditions, authority to spend money, transfer
funds, and fill positions may be delegated to subordinate man-
agers; the threat of reimposition of direct ex ante controls will be
sufficient to insure that the manager's behavior corresponds to the
customer's preferences. These conditions are: reimposition of con-
trols must be a credible threat; the gain to the manager from
delegation must more than offset the associated sacrifice in bar-
gaining power (the manager of an aging agency in the stable back-
waters of public policy, for example, has nothing to gain from
relief from ex ante controls if the price of such relief is a change in
business as usual); and the controllers must be confident that their
monitoring procedures, including postaudit, will identify viola-
tions of "trust."19
Clearly, all long-term relationships with service suppliers must
rely to a degree on ex ante controls. Even the operation of fixed-
price contracts requires prior specification of product quality stan-
dards and, sometimes delivery schedules. But flexible-price con-
tracts and lump-sum grants require considerably higher levels of
reliance on ex ante controls and also on monitoring and enforcing
compliance with them.
At the very least, adoption of one of these control system designs
means that controllers must take steps to ensure that suppliers
fairly and accurately recognize, record, and report their expenses.
This, in turn, requires careful definition of costs and specification
of appropriate account structures, bookkeeping practices and in-
ternal controls, direct costing procedures, and the criteria to be
used in allocating overheads.
But accurate accounts will not guarantee efficiency. Even if-as
is unlikely to be the case-the service supplier's financial and op-
erational accounts completely and accurately present every rele-
vant fact about the operating decisions made by its managers, they
will not provide a basis for evaluating the soundness of those deci-
sions. This is because cost accounts can show only what happened,
not what might have happened. They do not show the range of
asset acquisition choices and trade-offsthe supplier considered, let
alone those that should have been considered but were not.
As we have noted, under lump-sum budgets and flexible-price
contracts, asset acquisition decisions must be made, but the sup-
plier cannot be trusted to make them efficiently. Consequently,
suppliers must be denied some discretion to make managerial de-

Controllershipin thePublic Sector 559
cisions. The fundamental question is how much; that is, to what

extent should government "customers" or their controllers replace
or duplicate the supplier's managerial efforts?
It is necessary to pose this question because oversight is costly
both in terms of out-of-pocket monitoring and reporting costs and
also in terms of benefits sacrificed owing to the failure to exploit
the supplier's managerial expertise. The controller and the govern-
ment "customer," will very seldom be more competent to make
asset acquisition decisions than the supplier. The answer to this
dilemma is obvious: the minimum necessary, given the incentives
facing and the motivations of the service supplier. Sometimes, as
we have seen, the minimum necessary is a great deal indeed. It all
depends on circumstance and the controller's skill in exploiting
the opportunities that are created by the supplier's response to
institutional constraints. In other words, all long-term relation-
ships between government "customers" and service suppliers
must also rely on incentives, even those governed by lump-sum
budgets and flexible-price contracts. The difference is that when
these control system designs are employed, the incentives are
deeply embedded in the process of budget or contract execution.
VS.PRACTICE:
THEORY We have claimed that control system design should be matched to
ARE circumstances: increasing costs and homogeneous outputs imply
HOWBUDGETS
one kind of design; decreasing costs and heterogeneous outputs
EXECUTED
another. However, we do not observe perfect matching in practice.
Controllers tend to rely on monopoly supply and ex ante controls.
It is inconceivable that this combination is appropriate to every
service to which it is applied. Evidence can be marshaled to show
that a variety of these services could be performed satisfactorily by
competing organizations, including in alphabetical order: air traf-
fic control,20custodial services and building maintenance,21 day-
care centers,22 electrical power generation,23fire protection ser-
vices,24 forest management,25 management of grazing lands,26
hospitals and health care services,27housing,28postal services,29
prisons and correctional facilities,30property assessment,31 refuse
collection,32 security services,33 ship and aircraft maintenance,34
urban transit,35 waste water treatment,36 water supply,37 and
weather forecasting.38
Furthermore, even when controllers eschew monopoly supply,
they frequently fail to exploit fully the benefits of competition. In
New York City, for example, the social services agency acquires
child-care services for its clients from both public and private day-
care centers. But public centers are subject to the full panoply of ex
ante controls associated with lump-sum budgets, and private cen-
ters to those associated with the flexible-price contract.
To cite another example, Department of Defense policy restricts
the use of flexible-price contracts to situations characterized by
considerable procurement risk (primarily R&D projects). In other
contracts, the degree of incentive is supposed to be calibrated to
the project's riskiness. The first ship in a multiship construction

program is supposed to be constructed under a cost-plus, fixed-

profit contract, while later editions are required to be built under
fixed-price contracts, on the assumption that experience permits
the service supplier to manage to a narrower range of cost out-
comes and, therefore,to assume a greater share of the risk burden.
Peter De Mayo39observes, however, that while DoD generally
makes the proper transition from cost-plus to award-fee contracts
as it moves from design to prototype development, it usually fails
to make the transition to a fixed price on downstream production.
To be consistent with the logic advanced here, selection of defense
system production suppliers should be reduced to a question of
price search. Acquisition of these services should be based upon
fixed-price contracts, awarded by competitive bidding. Indeed,
where production volume is sufficient, DoD should usually main-
tain long-term contractual relations with two or more producers,
as multisourcing permits price search at each renegotiation of the
relationship between the DoD and its suppliers.40Nevertheless,
winning a contract to develop a weapons system continues to be
tantamount to winning subsequent production contracts in a high
proportion of cases.
Finally, not only do controllers tend to subject service producers
to a wide array of ex ante controls, they also often hold them to
tight output, quality, and service delivery schedules. As A. C. Ste-
dry has observed, performance targets that can be met with a
frequency approaching certainty cannot be very ambitious. In-
deed, any complex goal that is designed to be obtainable most of
the time almost certainly must be too low.41
What accounts for these mismatches between circumstances
and control system design? One possible explanation is ignorance
on the part of the controllers or their principals. If we had not
thought there was some validity to this explanation, we would not
have bothered to write this essay. Moreover,some of the empirical
data required to employ the design selection criteria outlined here
are often unavailable. The most critical gap in our knowledge has
to do with how costs vary with output. But even definitions and
measurements of service outputs and activities are sometimes in-
adequate. Unfortunately, insufficient effort has been made to cor-
rect this situation, although the analysis required is not particu-
larly intimidating. Of the two tasks, getting knowledge about the
shape of cost functions is the more difficult. But if we first answer
the question, "Cost to do what?" this knowledge can be derived
deductively in a manner similar to the method used in conven-
tional price theory.42Econometric cost and supply analysis can
also yield highly useful information about marginal and average
costs.43Finally, a careful program of experimentation with fund-
ing and output levels would greatly increase our knowledge of
service supply and cost functions.44
The kind of information collection called for here requires a
fairly high level of analytical sophistication both in design and
interpretation-something many of those responsible for execut-
ing budgets may lack. Indeed, even if controllers had good infor-

mationon cost and servicesupplyfunctions,some might not know

how to use it. Theirexperiencehas tended to orient them to the
administrationof the traditionalobject-of-expenditure budget or
lump-sum grant. Effective administrationof a lump-sum grant
requiresno more than a modicum of arithmeticalability, com-
bined with a substantial amount of horse sense and bargaining
savvy.Matchingcontrolsystemdesignto circumstancesrequiresa
practicalunderstandingof applied microeconomicsand financial
and managerialaccounting.That controllersoften fail to under-
stand the ideas outlined here or how to implement alternatives
to lump-sum appropriations(i.e., where to exercise judgment
and where to impose specific decision rules) is demonstratedby
their persistent attempts to use techniques that were devised
for use within organizations(for example, standardcosts based
on fully distributedaveragehistoricalcosts) to establish per-unit
prices for freestandingorganizationssuch as hospitals or univer-
sities.
But ignoranceis not an entirelysatisfactoryexplanationfor the
design decisions we have observed.Ignorancecan be corrected,
and incompetencemay be weededout. If a better match between
controlsystemdesignand circumstanceswouldhave a substantial
payoff,why hasn't this situationbeen corrected?
TOTHEAs AaronWildavskyremindsus:
IMPEDIMENTS
REDESIGN
OF
A large part of the literatureon budgetingin the United States is con-
SYSTEMS
CONTROL
cernedwith reform.The goals of the proposedreformsare couched in
similarlanguage-economy,efficiency,improvement,orjust betterbudg-
eting. The President,the Congressand its committees,administrative
agencies,even the citizenryare all to gain by somechange.However,any
effectivechangein budgetaryrelationshipsmustnecessarilyalterthe out-
comesof the budgetaryprocess.Otherwise,why bother?Farfrombeing a
neutralmatter of "betterbudgeting,"proposedreformsinevitablycon-
tain importantimplicationsforthe politicalsystem,that is the "whogets
what"of governmentaldecisions.45
If one assumes that the people who are empoweredto determine
the methodsused in executingbudgets are rational,Wildavsky's
observationimplies that they must have some interest in main-
tainingthe statusquo.Therefore,if we are to explainthe persistent
mismatchbetweencontrolsystem designsand circumstances,we
must determinewho benefitsfrom the status quo and, therefore,
who might oppose the adoptionof more appropriatecontrol sys-
tem designs.46
Stated this way, the explanationappearsobvious:membersof
Congress, state legislators, city council members, or any politician
with a constituency worth cultivating will likely face costs in mov-
ing from the status quo. As the collective holders of the power of
the purse, legislators clearly have the authority to order budgets to
be executed in almost any way that they like, including the power
to delegate that authority to controllers. As economists use the

Controllership
term, efficiency implies an exclusive concern with the supply of

goods and services to the citizenry and a more or less complete
indifference to the means used to supply these goods or to the
identity of the suppliers. We know that legislators are frequently
as concerned about where public money is spent and who gets it as
they are with what it buys.47Lump-sumappropriations in general
and object-of-expenditurebudgets in particular are ideally suited
to the satisfaction of legislative preferences with respect to how
public money is spent, where it is spent, and who gets it.
It may be viewed as naive to claim that legislators are always
individually or collectively devoted to maximizing the welfare of
the citizenry at large. All too often legislators assert their preroga-
tives on behalf of palpably inefficient ends (for example, opposi-
tion to closure of obsolete military bases). These actions may be
frequent enough to persuade controllers and operating managers
alike that legislators aren't at all interested in efficiency. Such
actions, however, do not appear to be the norm. Legislators have
complex motives and their actions and interests are no less com-
plex. Besides, legislators often reveal a profound respect for their
own limited capacities to manage the delivery of goods and ser-
vices. In many cases they are willing to delegate considerable au-
thority to individuals who have the expertise they lack, both indi-
vidually and collectively. Legislators usually take steps to
withdraw this authority only when it is abused, and even then
often reluctantly.48Indeed, many legislatures appear to delegate
far more authority to the controllers to experiment with alterna-
tive control system designs than they ever use.
Support for the claim that legislators are not entirely responsi-
ble for the excessive reliance on monopoly supply and ex ante con-
trols is found in a comparison of the budget execution methods
employed by council-manager and mayor-council municipalities.
Despite the fact that under the former, controllers are directly
subordinate to the legislative body, these municipalities are twice
as likely to rely on competitive supply and either per-unit prices or
fixed-price contracts as are their counterparts governed by a
strong mayor and council. They are also more likely to rely on ex
post internal controls. These findings hold even where region of the
country, size and age of municipality, and per-capita income are
held constant. We might also note that council-manager munici-
palities appear to be generally more efficient than are mayor-coun-
cil municipalities-other things being equal, they tend to have
lower taxes per capita, significantly lower tax rates, fewer employ-
ees, less debt, and higher bond ratings.49
The point of this discussion is not to deny that legislators have
an interest in the status quo, but to suggest that this is by no means
the whole story. Rather, if we are to understand control system
design and implementation we must also look to the controllers-
to the incentives they face, to their interests, and, therefore, to
their preferences. As is the case with any agents, controllers have
considerable discretion in the exercise of their responsibilities.50

They have the power to influence control system design; do they

also have an interest in the status quo?
The relevant literature51tells us that controllers are highly risk
averse, particularly with respect to outlay estimates. They are held
to be risk averse, not because they are inherently cautious (al-
though many of them are), but because of the incentives they face.
Controllers are rewarded for their success in matching revenues
and outlays. Consequently, fiscal balance tends to be their primary
objective. This objective is reflected in a tendency to execute budg-
ets so as to produce savings that may be appropriated when unan-
ticipated problems arise, to shift fiscal responsibility to other lev-
els of government, to the private sector, or to the future whenever
possible, and to give greater emphasis to the certainty of outlay
estimates than to the quality or quantity of service outputs.
Risk aversion might induce an excessive tolerance for technical
inefficiency or slack. Slack is one means of economizing on the
high costs of predicting the future and also the high cost of imme-
diate response to changed conditions. Thus, slack is not necessarily
waste. But because their principals hold them accountable for the
accuracy of their fiscal plan, and because they are only partially
responsible for avoiding inefficiency, it follows that controllers
might tolerate excessive slack-certainly more slack than would
be justified by the goal of net benefit maximization and probably
more than their principals would prefer.
Similar logic applies to their demands for operating informa-
tion. Controllers benefit from better information but bear little if
any of the cost of collecting it. As a result, controllers sometimes
demand too much as well as the wrong kinds of information in
budget preparation and execution. On the supply side, a depart-
ment manager's easiest excuse for failure to meet the controllers'
information demands is to plead ignorance. In some cases, in deny-
ing threatening information to the controllers, operating man-
agers deny valuable information to themselves.
Insofar as controllers are risk averse, the status quo is generally
consistent with their preferences. Under both lump-sum grants
and flexible-price contracts, but especially under the former, an-
nual outlays may be predicted with certainty (see Table 2). For that
matter, so can price, quantity or delivery schedule, and quality,
although not without efficiency losses. Other things being equal, a
truly risk-averse controller would prefer a solution to the service
supply problem in which the service supplier received a larger
than optimal lump-sum appropriation (containing some slack that
could be withdrawn without sacrificing valued outputs, if unantic-
ipated contingencies arose) and, therefore, higher per-unit prices
and lower output levels than would be possible. Under certain
circumstances such a pattern of outcomes would also be agreeable
to the service supplier. This is possible only undermonopoly supply.
Thus, when competitive supply is appropriate, both the service
supplier and the controller have an interest in the preservation of
their tacit bargain and would, therefore, oppose the shift to a more
appropriate control system design.

Table2. Whatcan be predictedwith perfectcertaintyunder

alternativecontrolsystemdesignswithoutsome loss in
efficiency
Ex Post control
Lump-sum Flexible
appropriation contract Indiv.resp. Org.resp.
Price NO NO NO YES
Quantity NO NO YES NO
Quality NO NO YES YES
Total Outlay YES YES NO NO
Is there any evidence to support these speculations? Interest-

ingly, the evidence is not only consistent with them, it is more
consistent with the speculations advanced here than it is with
alternative models of public sector supply behavior.52
Consider the case in which the aim is to maximize net benefit
(equate marginal cost and marginal benefit) and competitive sup-
ply is appropriate (for example, where average and marginal cost
are equal). This example is illustrated in Figure 1.
In this case, under competitive supply, suppliers would operate
at A, where marginal cost equals marginal benefit. However, as
argued in the public choice literature,53under monopoly supply
the actual price-output combination could be anywhere in the re-
gion ABC, depending on the bargaining power of the controllers,
their ability to monitor technical inefficiency, and their prefer-
ences. Nevertheless, there are three models that predict a determi-
nant solution to the output-price problem under monopoly supply:
the pure technical inefficiency model,54 the original Niskanen
model,55and the Migu6 and Belanger model.56Under pure techni-
cal inefficiency, controllers are able to enforce allocative efficiency
but are unable to detect or unwilling to control technical ineffi-
ciency on the part of the monopoly supplier. These assumptions
imply that the controller would require the supplier to operate at
D, where marginal benefit equals observed marginal cost. Under
the original Niskanen model, controllers are perfectly ineffective,
and a cost-constrained supplier would maximize its budgets at C.
Under the Migu6 and Belanger model, controllers are again as-
sumed to be impotent, but the supplier maximizes a utility func-
tion in which both slack and revenue are arguments and would,
therefore, operate at E.
Given the tacit bargain between a budget-maximizing supplier
and a risk-averse controller outlined above, the solution to the
price-output problem is indeterminate but would have to be some-
where in the region bounded by AFG. The supplier would not ac-
cept a price-output combination that would produce a smaller
budget than could be obtained at A, and the controllers would hold
it to output levels to the left of AF. (The points along AGare combi-

Price,Cost
P2 \ \ MC,AC(observed)
P1 \ \ Mr MC,AC (actual)
AB
\4monopoiM, Rcompetitive
0 ODOH 0E
QDQHQAQE QC Quantity
Quantity
Figure 1. Alternative Service Demand and Supply Models.

AB = Total demand for the service in question or average benefit to
consumers. Where the service provider is a perfectly effective,
price-discriminating monopoly, this is also its average revenue
curve.
MB = Demand curve or marginal benefit schedule. Where the service is
provided by a perfectly-effective,price discriminating monopo-
list, this is also its marginal revenue schedule. Where the service
provider or providers are price takers, this is their average reve-
nue or price schedule. Under competition, marginal revenue for
each firm equals price, so this is also the competitive marginal
revenue schedule.
MR(monopoly) = Marginal revenue schedule for a price taking monopolist.
AC,MC (actual) = True long run supply schedule.
AC,MC(observed) included for illustrative purposes. Each of these models implies
that suppliers would reveal a different supply schedule.
nations of price and output levels that yield budgets of identical

size to the budget realized at A.)
Each of these models may be tested by comparing the output,
price, and total outlays that result under monopoly supply with
those that obtain under competition. The predictions implied by
the alternative models are summarized in Table 3.
What we observe, when competitive supply of a service is appro-
Table 3. Output, price, and total outlay effects of changing from

monopoly to competitive supply.
Output Price Outlay Demand*

Pure technical inefficiency ? -2
Niskanen model 1 1i 1
Migue-Belanger model l $ >1
Risk-Averse controllers ? I
* Absolute
price elasticity of demand. Where >1, outlays will increase as output
is increased; where <1, outlays will decrease as output is increased.

priate and is compared with monopoly supply of the same service,

is a lower per-unit price, increased quantity and/or quality of ser-
vice provided, and lower total budget outlays.57When movement
is from competition to monopoly supply, the reverse occurs.58This
is precisely what the speculations presented here with respect to
the controller's behavior predict: increased competition would
permit government to get more for less money.
An additional piece of evidence of the validity of our assertions
might be noted. One of the more perplexing findings in the litera-
ture on public finance is that the absolute values of the observed
price elasticities of demand for publicly purchased services are
frequently less than one.59Indeed, exceptions to this finding are
relatively rare. Thomas McGuire'ssurvey of the literature reported
nineteen elasticities, only six of which were greater than one.60
Given a binding cost constraint, such an outcome is simply incon-
ceivable under the alternative models presented in Table 3. Even
William Niskanen's original budget-maximizing model predicts
that elasticities will be equal to or greater than one. However, if
the speculations presented here with respect to the tacit bargain
between controllers and monopoly suppliers were valid, actual
outcomes would be observedin the region AFG.Statistical analysis
based on observations of these outcomes would, therefore, tend to
report elasticities of less than one.
We have claimed that improvements in management control and

CONCLUSION
budget execution are both desirable and possible. We have also
explained why those responsible for designing and operating con-
trol systems might, at this time, oppose reform. If our argument is
correct, the situation is happy, indeed. If elected officials were
entirely to blame for the frequent mismatch between control sys-
tem design and circumstances, there would be very little that
could be done to improve control system design and implementa-
tion, short of changing our political institutions. Controllers, how-
ever, are responsible to their principals-elected officials. If the
incentives controllers face lead them to produce unfortunate out-
comes, the situation can be corrected by modifying those incen-
tives. These modifications should lead to increases in the quantity
and quality of the goods and services purchased with public
money, as well as a reduction in their prices.
FRED THOMPSON teaches public management and policy analysis
at the Atkinson Graduate School of Management, Willamette Univer-
sity. L. R. JONES is Associate Professor of Public Management, the
Division of Public Administration, University of New Mexico.
NOTES 1. Anthony, R., and Young, D., ManagerialControlin Non-ProfitOrgani-

zations (Irwin, 1984), Chapters7, 8, and 9. This essay deals with pro-
grams that serve the allocational functions of government. Our obser-
vations are not intended to be relevant to programs that serve either
the stabilization or the distribution functions of government.
2. Ibid., p. 288. Note, in the marketing literature customers pay for ser-

vices; clients get them. By pay for, we mean making a decision that
results in increased cash inflows for the relevant organizations.
3. Ibid., p. 20.
4. We are aware of three particularly salient exceptions to this observa-
tion not elsewhere cited in this essay: Simon, Herbert A., et al., Cen-
tralization vs. Decentralization in Organizing the Controller'sDepart-
ment (New York: The Controllership Foundation, Inc., 1954); Shick,
A., "Control Patterns in State Budget Execution," Public Administra-
tion Review, 24 (June 1964): 97-106; and Schick, A., "Contemporary
Problems in Financial Control," in F. Lane (ed.), CurrentIssues in
Public Administration, 2 ed. (St. Martin's Press, 1982), pp. 361-71.
Indeed, this essay may be read as a commentary on the concluding
paragraphs of the second of Schick's articles on budget control.
5. Anthony and Young, op. cit., p. 21.
6. This formulation reflects the logic presented in J. Demski and G. Fel-
tham, Cost Determination(Iowa State University Press, 1967).
7. The term "nominal subordinate" is due to Breton, A., and Wintrobe,
R., "The Equilibrium Size of a Budget Maximizing Bureau," Journal
of Political Economy, 83 (1975): 195-207. The importance of the dis-
tinction between vesting responsibility in an individual or an entity
was brought to our attention by Williamson, O., The Economics of
DiscretionaryBehavior(Prentice-Hall, 1964), and Williamson, O., Mar-
kets and Hierarchies(Free Press, 1975).
8. Economists have traditionally ignored the structure of organizations
and their actual operations. Coase broke this tradition by looking into
the "black box," arguing that organization is a means of minimizing
transaction costs. See Coase, R., "The Nature of the Firm,"
Economica, 4 (1937). As a consequence, two literatures on organiza-
tional structures have developed. The first deals with contracts, in-
cluding budgets within the organization. See, for example, S. N. S.
Chueng, "The Contractual Nature of the Firm," Journal of Law and
Economics, 25 (April 1983); Holmstrom, B., "Moral Hazard and Ob-
servability," BellJournalofEconomics, 10 (Spring 1979);or Mirlees, J.,
"The Optimal Structure of Incentives and Authority within an Orga-
nization," Bell Journal of Economics, 7 (Spring 1976). The second ex-
amines contracts between customers and organizations and attempts
to explain the existence of various types of contracts and organiza-
tions. See Weisbrod, B. A., "The Economics of Institutional Choice,"
University of Wisconsin, working paper (1979); Friedman, L., "Public
Institutional Structure and Resource Allocation," Graduate School of
Public Policy working paper, University of California-Berkeley (Oc-
tober 1979). Borcherding, T., "Toward a Positive Theory of Public
Sector Supply Arrangements,"Simon Fraser University, working pa-
per (November 1980); Hammann, H. B., "The Role of Non-Profit En-
terprise," Yale Law Journal, 89 (April 1980); and Easley, D., and
O'Hara,M., "The Economic Role of the Non-ProfitFirm,"Bell Journal
of Economics, 14 (Autumn 1983). This literature has already influ-
enced the literature on managerial accounting (e.g., Demski and Fel-
tham, op. cit.; Ouchi, W., "A Conceptual Framework for the Design of
Organizational ControlMechanisms,"ManagementScience, 25 (1977);
and public finance (e.g., Breton and Wintrobe, op. cit.; McGuire, T.,
Courier,M., and Spancake, L., "Budget Maximizing Bureaus and Effi-
ciency in Government," Public Choice, 34 (3-4) (1979): 333-57, or
Conybeare,John, "Bureacuracy,Monopoly, and Competition," Ameri-

568 Controllershipin thePublic Sector
can Journalof PoliticalScience, 28 (3) (1984): 479-502. For a nontech-

nical introduction to this literature, see T. Moe, "The New Economics
of Organization,"AmericanJournalof Political Science, 28 (4) (1984):
739-777.
9. Baron, D. P., "Regulatinga Monopolistwith UnknownCosts,"Econo-
metrica,50 (1982).
10. See Goldberg, V., "Regulation and Administered Contracts," Bell
Journal of Economics, 7 (1976): 426-48. On the design of per-unit
prices, see Thompson, F., "How to Stay within the Budget Using Per-
Unit Prices,"Journalof Policy Analysisand Management,1 (4) (1984),
Thompson, F., and Fiske, G., "One More Solution to the Problem of
Higher Education Finance," Policy Analysis, 4 (3) (1978).
11. See Anthony and Young, op. cit., or any standard text on managerial
accounting. The principal mechanism through which this control sys-
tem design is employed at the federal level is the revolving fund. See
Bailey, M., "Decentralization through Internal Prices," in S. Enke
(ed.), DefenseManagement(Prentice-Hall,1967),pp. 337-52; Beckner,
N. V. "GovernmentEfficiency and the Military's Buyer-Seller Rela-
tionship," Journal of Political Economy, 68 (1960); Hirschleifer, J.,
"On the Economics of Transfer Pricing," Journal of Business, 19
(1956); and "Economics of the Divisionalized Firm," ibid., 20 (1957).
12. The argument outlined here follows that of Goldberg,op. cit. See also
Peck M., and Scherer, F., The WeaponsAcquisition Process: An Eco-
nomic Analysis (Harvard Business School, 1962); Scherer, F., The
WeaponsAcquisitionProcess:Economic Incentives(HarvardBusiness
School, 1964);and Fox, R., ArmingAmerica:How the U.S. Buys Weap-
ons (HarvardUniversity Press, 1974).
13. Hofstede, G. H., The Game of Budget Control (Van Gorcum & Co.,
1967). That the execution process is repetitive makes it incremental.
That it is constrained by a constantly updated set of ex ante controls
makes it continuous.
14. This is, of course, the classic bilateral monopoly problem of microeco-
nomics. See Breton and Wintrobe,op. cit.; see also Morgan,J., "Bilat-
eral Monopolyand the CompetitiveOutput,"QuarterlyJournalof Eco-
nomics, 63 (1949): 370-81; and Meyerson, R. B., "Incentive
Compatibility and the Bargaining Problem,"Econometrica,47 (1979).
15. Stark, R., and Varley, T., "Bidding, Estimating, and Engineered Con-
struction Contracting,"in R. Engelbrecht-Wiggins,M. Shubik, and R.
Stark (eds.), Auctions,Bidding,and Contracting(New York University
Press, 1983), pp. 121-35.
16. The differenceis that preferenceestimates appear to be drawn from a
sample that is normal, while performance estimates appear to be
drawn from a sample that is log normal. Stark, R., "On Cost Analysis
for Engineered Construction,"in Engelbrecht-Wiggins,op. cit.
17. Thompson, F., and Zumeta, W., "Controland Controls:A Reexamina-
tion of Control Patterns in Budget Execution," Policy Sciences, 13
(1981): 25-50. For evidence that public sector bureaus act as if they
were budget maximizers, see Thompson, F., "Utility Maximizing Be-
havior in Organized Anarchies,"Public Choice, 36 (1981).
18. This logic is informally explicated in Wildavsky, A., and Hammann,
A., "Comprehensiveversus IncrementalBudgeting in the Department
of Agriculture,"AdministrativeSciences Quarterly,10 (1965): 321-46.
19. See Thompson and Zumeta, op. cit. Delegation of this authority is not

in thePublicSector
Controllership 569
unusual. Although most federal agencies are held to fairly strict ap-
portionment schedules, OMBdelegates to them the administration of
most other ex ante controls. The degree of delegation is less frequently
nicely calibrated to circumstances, however. See Pitsvada, B. T.,
"Flexibility in Federal Budget Execution," Public Budgeting and Fi-
nance, 2(3) (1983); Draper, F., and Pitsvada, P. T., "Limitations on
Federal Budget Execution," GovernmentAccountants Journal, 30(3)
(1981); and Fisher, L., PresidentialSpendingPower (Princeton Univer-
sity Press, 1975).
20. Poole, R., "Air Traffic Control: The Private Sector Option," Heritage
Foundation Backgrounds,216 (5 October 1982).
21. Bennett, J. and DiLorenzo, T., "Public Employee Unions and the Pri-
vatization of 'Public Services,' "Journal of LaborResearch, 4 (Winter
1983): 43; Blankart, C. B., "Bureaucratic Problems in Public Choice:
Why Do Public Goods Still Remain Public?" in R. Roskamp (ed.),
Public Choice and Public Finance (CujasPublishers, 1979), pp. 155-67.
22. Bennett and DiLorenzo, op. cit.
23. Ibid.
24. Poole, R., "Fighting Fires for Profit,"Reason (May 1976); Smith, R. G.,
"Feet to the Fire,' Reason (May 1983): 23-29.
25. Hanke, S., "The Privatizaton Debate," Cato Journal (1982): 656.
26. Hanke, S., "Land Policy," in R. Howill, (ed.), Agenda 83 (Heritage
Foundation, 1983), p. 65.
27. S. Hanke, "Privatization: Theory, Evidence, Implementation," in
Harriss, ed., Control of Federal Spending (Academy of Political Sci-
ence, 1985), pp. 106-07.
28. Weicker, J., Housing (American Enterprise Institute, 1980), p. 80.
29. Hanke, op. cit., p. 108.
30. Ibid., 108-09.
31. Poole, R., CuttingBack City Hall (University Books, 1980), p. 164.
32. Savas, E. S., "Policy Analysis for Local Government,"Policy Analysis,
3 (1977): 49-77; Bennett, J., and Johnson, M., "Public v. Private Provi-
sion of Collective Goods and Services," Public Choice, 34 (1979): 55-
63.
33. Hanke, op. cit., p. 109-10.
34. Bennett, J., and Johnson, M., BetterGovernmentat Half the Price: Pri-
vate Productionof Public Services(CarolineHouse Publishers, 1981), p.
52; Bennett and DiLorenzo, op. cit., p. 43.
35. Hanke, op. cit., p. 110.
36. Ibid.
37. Crain, M., and Zardkoohi,A., "ATest of the Property Rights Theory of
the Firm: Water Utilities in the United States," Journal of Law and
Economics, 14 (1978); 145-68.
38. Bennett and DiLorenzo, op. cit., p. 39.
39. De Mayo, P., "Bidding on New Ship Construction," in Engelbrecht-
Wiggins, op. cit., pp. 371-87.
40. See Gansler, J., The Defense Industry (Cambridge, Mass.: MIT Press,
1980); R. Fox, op. cit.
41. Stedry, A. C., Budget Controland Cost Behavior (Prentice-Hall, 1960).
March and Simon argue that performance as maximized under condi-
tions of "optimal stress"; that is, when "the carrot is just a little way

ahead of the donkey-when aspirations exceed achievements by a

small amount." If the gap is too small, it will fail to elicit a creative
response; if it is too large, it will result in frustration and resignation
to failure. See March,J., and Simon, H., Organizations(Wiley, 1958),
p. 184.
42. Shoup, C., Public Finance (Aldine-Atherton,1969).
43. See, for example, Thompson, F., and Zumeta, W., "A Regulatory
Model of Government Coordinating Activities in Education," Eco-
nomics of Education Review, 1 (1981): 27-53, Jones, L. R., University
Budgeting for Critical Mass and Competition (New York: Praeger,
1985), Chapters6 and 7.
44. See especially Thompson, E., "Book Review," Journal of Economic
Literature,11 (1973): 950-53. See also Thompson,F., and Zumeta, W.,
op. cit., pp. 33-34.
45. Aaron Wildavsky, "Political Implications of Budget Reform," Public
AdministrationReview,21 (1961): 183-90.
46. This is precisely the approach taken in Zimmerman,J., "The Munici-
pal Accounting Maze: An Analysis of Political Incentives," Journal of
AccountingResearch,21 (1977): 107-44.
47. Arnold, D., Congress and the Bureaucracy (Yale University Press,
1979); Ferejohn, J., Pork Barrel Politics (Stanford University Press,
1974);Fiorina,M., Congress:Keystoneof the WashingtonEstablishment
(Yale University Press, 1977),Shepsle, K., and Weingast, B., "Political
Preferencesfor the PorkBarrel,"AmericanJournalof PoliticalScience,
25 (1981).
48. Note the protracted debate on presidential impoundment authority
prior to the eventual enactment of the 1974 CongressionalBudget and
Impoundment ControlAct. See Fisher, op. cit.
49. See Zimmerman, op. cit.
50. See Mitnick, B., "The Theory of Agency: The Policing 'Paradox' and
RegulatoryBehavior,"PublicChoice,24 (1975);Miller, G. J., "Bureau-
cratic Compliance,"Public Choice,30 (1977). Again, Moe, op. cit., pro-
vides an excellent nontechnical introduction to this literature.
51. See Wildavsky,A., Budgeting:A ComparativeTheoryof the Budgetary
Process (Little, Brown, 1975), p. 118-9; Larkey,P., Evaluating Public
Programs:The Impact of GeneralRevenueSharing on Municipal Gov-
ernment(Princeton University Press, 1979); Crecine, J., Kamlett, M.,
Mowery, D., Stolp, C., and Winer, M., "The Role of the U.S. Office of
Management and Budget in Executive Branch Budgetary Decision
Making," Carnegie-MellonUniversity, January 1980; Cothran, D.,
"Program Flexibility and Budget Growth," WesternPolitical Quar-
terly,34 (1981): 593-610.
52. An exception is Weimer,D., and Evans, L., "Communicationon Millar
and Moe," University of Rochester, 1985, which demonstrates that
"[a]s long as bureaucrats place some value on discretionary re-
sources, demand concealing oversight leads to underproduction and
waste" (p. 4).
53. Breton and Wintrobe;McGuire,Courier,and Spancake, op. cit.
54. Conybeare,op. cit. See, however, Lindsay, C., "A Theory of Govern-
ment Enterprise,"Journal of Political Economy, 84 (1976): 1059-73.
Lindsay argues that performance monitoring performed by the con-
trollers is merely highly imperfect. Because of this, he argues, the
average quality of public services will be lower than the quality of

Controllershipin thePublic Sector 571
similar services provided by the private sector and so will average

cost. These predictions are partially borne out in his comparison of
VA and proprietary hospitals.
55. Niskanen, W., Bureaucracy and RepresentativeGovernment (Aldine-
Atherton, 1971); see also Niskanen, W., "Bureaucrats and Politi-
cians," Journal of Law and Economics, 18 (1975): 617-44. This is an
abstracted version of Niskanen's model. According to Niskanen, gov-
ernment tends to oversupply largely private goods and to undersup-
ply largely public goods; the net effect of these two tendencies is not
unambiguous. He also reminds us that under specified conditions,
revenue maximization is perfectly consistent with welfare maximiza-
tion. (For a cost-constrained bureau, revenue maximization implies
output maximization.) In his fully elaborated model, revenue maxi-
mization and monopoly supply are necessary, but not sufficient, con-
ditions for government oversupply of largely private goods. A second
and critical condition is that demand is mediated through Congress,
and that the structure of Congress biases its decisions toward high
levels of supply of largely private goods and services. See also Miller,
G. J., and Moe, Terry, "Bureaucrats,Legislators, and the Size of Gov-
ernment," AmericanPolitical Science Review, 77 (1983): 297-322.
56. Migue, J., and Belanger, L., "Towarda General Theory of Managerial
Discretion," Public Choice 17 (1974): 27-47.
57. Bennett, J., and Johnson, M., op. cit.; Savas, E. S., op. cit.; Deacon, R.
T., "The Expenditure Effects of Alternative Public Sector Supply In-
stitutions," Public Choice, 34 (1979): 381-98. See also Section 2 of
Stanbury, W., and Thompson, F., (eds), Managing Public Enterprises
(Praeger, 1982).
58. Spann, R., "Public versus Private Provision of Governmental Ser-
vices," in T. Borcherding (ed.), Budgetsand Bureaucrats(Duke Univer-
sity Press, 1977), pp. 71-89; and Staaf, R. J., "The Public School in
Transition," also in Borcherding, pp. 130-47.
59. See Conybeare, op. cit.
60. McGuire, T. "Budget Maximizing Government Agencies," Public
Choice, 36 (1981): 313-22.


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Controllership in the Public Sector

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Ineffective or incompetentcontrollershipis, perhaps, the most

Central control agencies perform two distinct functions on be-

* The authors wish to thank T.

Journal of Policy Analysis and Management, Vol. 5, No. 3, 547-571 (1986)

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Control systems design and implementation is a ubiquitous prob-

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This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

vices supplied by a public agency is grossly unsatisfactory, the

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Table 1. The microeconomics of control system design.

Homogeneous Individual Organizational

put) can be monitored and the desirability of interorganizational

OF These four basic control system designs are widely employed in

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logic of ex ante control is not. Presumably it will be more useful to

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

from the organization's managers their best efforts. Conceivably,

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continuously providing a service for a specified period. In both

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and asking price. In this case, a fixed-price contract should be

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

Given comprehensive ex ante controls, under which changes can

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

hensivedismantlingand restructuringsince thereis usuallya sense that

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

lower cost? Will higher priority activities be carried out at the

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

cisions. The fundamental question is how much; that is, to what

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program is supposed to be constructed under a cost-plus, fixed-

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

mationon cost and servicesupplyfunctions,some might not know

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term, efficiency implies an exclusive concern with the supply of

This content downloaded from 111.68.99.3 on Tue, 24 Feb 2015 23:56:04 PM

They have the power to influence control system design; do they

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Table2. Whatcan be predictedwith perfectcertaintyunder

Is there any evidence to support these speculations? Interest-

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Figure 1. Alternative Service Demand and Supply Models.

nations of price and output levels that yield budgets of identical

Table 3. Output, price, and total outlay effects of changing from

Output Price Outlay Demand*

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priate and is compared with monopoly supply of the same service,

We have claimed that improvements in management control and

NOTES 1. Anthony, R., and Young, D., ManagerialControlin Non-ProfitOrgani-

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can Journalof PoliticalScience, 28 (3) (1984): 479-502. For a nontech-

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