Rational Choice Theory

Question 1

Briefly Explain Public Choice

Answer 1

Neoclassical economic theory applied to public sector.

Seeks to build a bridge between microeconomics and politics by viewing the actions of citizens, politicians, and public servants analogous to actions of self-interested producers and consumers (Buchanan 1972).

Analogy conceives public sector in market terms and uses theoretical tools from economics. Tools known as political economy or welfare economics; best known and applied as rational or public choice.

Question 2

What is the Problem that Public Choice Theory Aims to Address?

Answer 2

Seeks to build a bridge between microeconomics and politics by viewing the actions of citizens, politicians, and public servants analogous to actions of self-interested producers and consumers (Buchanan 1972).

The theory aims to apply economic analysis (decision theory) to the political decision-making process in order to reveal certain systematic trends towards inefficient government policies.

Question 3

What are the intellectual roots of Public Choice Theory?

Answer 3

Intellectual roots of rational choice date back to the work of Adam Smith, whose The Wealth of Nations (first published in 1776), is the intellectual rock on which neoclassical economic theory is constructed (Frederickson et al., 2012). Smith’s great insight was that people acting in pursuit of their own self-interest could, through the mechanism of the “invisible hand,” produce collective benefits that profited all society.

Question 4

What is the behavioral assumption of RCT?

Answer 4

Behavioral assumption is that SELF-INTEREST drives decisions and actions.

Citizen-consumers shop for public goods and services they most prefer, and producers of these services are competitive organizations whose self-interest is coupled to the need for efficient response to consumer demand.

Question 5

List 3 hallmarks of neoclassical economic thought and central to rational choice theory

Answer 5

1. The self-interested actor
2. Competition among producers
3. Relatively unregulated market

Question 6

Rational choice theory basic intellectual toolkit is centuries old but students of PA largely ignored it until mid-20th century (1950s) when economists began transferring theories to politics. Which works and authors presented an immediate challenge to orthodox thinking in PA and PolSci?

Answer 6

Anthony Downs (1957), Economic Theory of Democracy and James Buchanan and Gordon Tullock (1962), The Calculus of Consent. Buchanan and Tullock’s work is widely considered to mark the formal founding of rational choice theory.

Question 7

Which key characteristics separated the works of Downs (1957) and Buchanan and Tullock (1962) from traditional approaches to political and PA theory?

Answer 7

The RATIONAL SELF-INTERESTED ACTOR (SELF-INTERESTED UTILITY MAXIMIZER) VS. PUBLIC INTEREST

In this framework the SELF-INTERESTED UTILITY MAXIMIZER replaces the public-spirited citizen and the neutrally competent public servant of the orthodoxy.

Question 8

How does RCT contradict orthodox PA notion of who should provide public service and how?

Answer 8

Rational choice theory contradicts orthodox PA notions of who should provide public services and how: (orthodoxy) bureaucracies in centralized jurisdictions that are responsive to representative democratic institutions, rather than demand.

Question 9

List the 2 key assumptions of Rational Choice Theory, as outlined by Buchanan and Tullock.

Answer 9

2 Key Assumptions of RCT outlined by Buchanan and Tullock theory:
1. The average individual is a SELF-INTERESTED UTILITY MAXIMIZER. (Knows preferences or goals, can rank-order them, and when faced with a set of options to achieve those preferences will choose those expected to maximize individual benefits and maximize individual costs. This preferred mix of benefits and costs is referred to as an individual’s utility function, and Buchanan and Tullock (1962, 32) argued that individuals will act to maximize that utility by choosing “more rather than less” of their preferences.
2. METHODOLOGICAL INDIVIDUALISM: ONLY INDIVIDUALS, NOT COLLECTIVES MAKE DECISIONS.
It presumes collective decisions are aggregations of individual choices, not a unique property of the group (Frederickson, et al., 2012). Methodological individualism makes self-conscious use of the perspective of representative individual or set of representative individuals in the conduct of analysis (Buchanan, 1966). The representative individual may be a member of a hypothetical community, an entrepreneur, a public employee, or some other person whose interest is explicitly stated. Assumptions about individuals normally include reference to (1) self-interest (2) rationality (3) information (4) law & order (5) choice of a maximizing strategy (Ostrom, 2008).

Question 10

Explain the RCT assumption of the Self-Interested Utility Maximizer

Answer 10

The average individual is a SELF-INTERESTED UTILITY MAXIMIZER. (Knows preferences or goals, can rank-order them, and when faced with a set of options to achieve those preferences will choose those expected to maximize individual benefits and maximize individual costs. This preferred mix of benefits and costs is referred to as an individual’s utility function, and Buchanan and Tullock (1962, 32) argued that individuals will act to maximize that utility by choosing “more rather than less” of their preferences.

Question 11

Explain the RCT assumption of Methodological Individualism

Answer 11

METHODOLOGICAL INDIVIDUALISM - Only individuals, not collectives make decisions. It presumes collective decisions are aggregations of individual choices, not a unique property of the group (Frederickson, et al., 2012). Methodological individualism makes self-conscious use of the perspective of representative individual or set of representative individuals in the conduct of analysis (Buchanan, 1966). The representative individual may be a member of a hypothetical community, an entrepreneur, a public employee, or some other person whose interest is explicitly stated.

Question 12

The RCT assumption of Methodological Individualism assumes the following regarding individuals:

Answer 12

Assumptions about individuals normally include reference to (1) self-interest (2) rationality (3) information (4) law & order (5) choice of a maximizing strategy (Ostrom, 2008).

Question 13

What impact has Rational Choice had on the applied and scholarly sides of public administration? List three primary ways:

Answer 13

Impact of RCT has been felt in three primary ways:
1. ORGANIZATIONAL BEHAVIOR. Rational Choice Theory offers a comprehensive framework to answer the question of why bureaucracies and bureaucrats do what they do.
2. PUBLIC SERVICE DELIVERY. Rational Choice Theory offers an explanation of how public goods are produced and consumed. This explanation is in contrast to previous PA presumptions. (orthodoxy) bureaucracies in centralized jurisdictions that are responsive to representative democratic institutions, rather than (RCT) self-interest is coupled to the need for efficient response to consumer demand.
3. A CLAIM FOR A NEW THEORETICAL ORTHODOXY. Advocates of RCT have argued that it is the natural successor to the Wilsonian/Weberian ideas that has dominated a century’s worth of intellectual development in rational choice. Some suggest rational choice is a positive (explanation of how the world does work) and normative theory (explanation of how the world should work). As normative theory, argued to be a way to fuse Adam Smith’s economic theory and Madison/Hamilton democratic theory. Rational choice staked a claim to meet the challenges of Dwight Waldo and John Gaus, public administration scholars who argued the discipline could move forward only when administrative theory developed into political theory.

Question 14

Rational Choice Theory offers a comprehensive framework to answer the question of why ______ and ______ __ ____ ____ __.

Answer 14

Rational Choice Theory offers a comprehensive framework to answer the question of why bureaucracies and bureaucrats do what they do.

Question 15

Explain how the Tiebout Model is an Alternative Solution to the administration orthodoxy

Answer 15

An alternative solution to the administration orthodoxy is the Tiebout Model.

The model prescriptively implies the exact opposite of orthodox approaches to supplying public services.

The central hypothesis of the Tiebout model and it’s various extensions is that many agencies competing horizontally (across jurisdictions) and vertically (within jurisdictions) will provide a higher-quality service at a lower price, and be more attuned to citizens’ preferences, that will large bureaucracies in centralized jurisdictions.

According to the Tiebout hypothesis, fragmentation stimulates competition, creates incentives for efficiency and responsiveness, and should therefore lower spending.

Question 16

2 Key Concepts Germane to Rational Choice Theory (Public Choice) and the Work of Ostrom and Tiebout are
Public Goods and Externalities.

Part 1: Define Public Goods

Answer 16

1. Public Good – indivisible, something that cannot be broken up and distributed individually. Require binding collective decisions rather than individual. For example, an individual consumer can purchase a car or a can of soda based on personal preferences with relatively little input or impact from anyone else. This is hard to do with public goods, such as clean air or national defense because they require binding collective decisions, rather than individual. For this reason, production of public goods is traditionally concentrated under government control (Frederickson, et al., 2012).
2. Pure Public Good – refer to goods/services that exhibit 2 properties/essential characteristics:
    Non-rivalry in consumption: any level of public good, each consumer can enjoy it w/o diminishing the amount available for others. One additional person can consume the good without reducing any other consumer’s benefit; after the good or service is produced, the marginal cost of an additional consumer is zero. Cost of producing a pure public good is constant. Costs are the same amount whether you build 1 product or 1,000 products. Nonrival goods – uncrowded streets, bridge, or park (Several provided by state, local governments).

 Non-excludable – it is not possible (at least at reasonable cost) to exclude customers who do not pay the price from consuming the good or service. Once a service (or good) is provided there is no effective way to prevent nonpaying “customers” from enjoying the service. Non-excludability of nonpayers could benefit for sources as national defense, sewer systems, basic television, radio broadcasts, clean air, or lighthouse (Tiebout, 1956).

Question 17

2 Key Concepts Germane to Rational Choice Theory (Public Choice) and the Work of Ostrom and Tiebout are
Public Goods and Externalities.

Part 2: Define Externalities

Answer 17

3. Externalities - are indirect costs or benefits that spill over to a third party from a transaction between a producer and consumer. Can lead to market inefficiencies because it wasn’t accounted for
   o Positive externalities – are benefits to a third party
    Ex: education. When an individual receives an education, the entire community benefits and not just the individual

o Negative externalities – costs to a third party. Can lead to market failures if not controlled. Can be controlled by the government implementing strict regulations.
 Ex Pollution caused by oil drilling

Question 18

What does the Tiebout Model say about fragmentation?

Answer 18

According to the Tiebout hypothesis, fragmentation stimulates competition, creates incentives for efficiency and responsiveness, and should therefore lower spending.

Question 19

According to the Tiebout Model, what is the impact of many agencies competing horizontally (across jurisdictions) and vertically (within jurisdictions)?

Answer 19

The central hypothesis of the Tiebout model and it’s various extensions is that many agencies competing horizontally (across jurisdictions) and vertically (within jurisdictions) will provide a higher-quality service at a lower price, and be more attuned to citizens’ preferences, than large bureaucracies in centralized jurisdictions.

Question 20

What are the assumptions of the Tiebout Model?

Answer 20

To make his model work, Tiebout was required to make several assumptions about individual actors that went above rational utility maximization.
1. First, Tiebout assumed that citizens are perfectly mobile, meaning they can easily move from community to community.
2. Second, the model requires citizens to be highly informed about tax-service packages across several jurisdictions.
Other Tiebout assumptions:
3. A large number of communities exist from which to choose;
4. No restrictions or limitations exist on consumer mobility due to employment opportunities because people generate interest income;
5. Public services provided have no externalities or spillover effects; therefore, public goods and services in one area have no effect on the other;
6. At least one input factor is in fixed supply (e.g., as the population expands, that water plant cost is spread out among the consumers but the fixed cost does not change); and
7. Communities not at the optimum size seek to attain the optimum either through population growth or decline to take advantage of scale economies for reaching the minimum average cost of producing public goods

Question 21

What were Tiebout’s views on the assumptions of the Tiebout Model?

Answer 21

Tiebout did not seriously propose that these conditions existed in reality, but he adopted them as necessary simplifying assumptions to make the model tractable

The more realistic micro-level expectations implied by the Tiebout model are that citizens in fragmented government settings will be more informed about public services than those in centralized government settings; will be more likely to exit if they are dissatisfied with those services; and, given that can make choices about tax-service packages, will be more satisfied with the services they do receive. (Frederickson, et at, 2012, p. 206).

Individuals have the ability to vote on budget issues by voting at the polls or by voting with their feet and moving to a different jurisdiction that was more suitable to their standards. (Fischer, 1996).

Question 22

Historical context - Why did the works of Tullock, Downs, and Niskanen stike a chord in PA, in the late 1960s and 1970s?

Answer 22

In the late 1960s and 1970s, the work of scholars such as Tullock, Downs, and Niskanen struck a chord not just because their theoretical approach was novel to PA, but also because their conclusions fit a widely held perception of bureaucracy. As public service expanded in the decades after WWII, people began to question the cost and efficiency of public services. The ineffective and inefficient bureaucracy of popular perception gained intellectual confirmation in these works.

Question 23

RCT prescriptive conclusions – less bureaucracy, less centralization, and more competition in the production of public services – may have turned _____ _____ on its head, but they found a ready audience in policy circles.

Answer 23

The prescriptive conclusions – less bureaucracy, less centralization, and more competition in the production of public services – may have turned administrative orthodoxy on its head, but they found a ready audience in policy circles.