Bureaucrats, Bureaucracy and Utility Maximization: Empirical Evidence From Taiwan.
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- Economics; general; Economics; finance
thesis / dissertation description
An important issue in public finance is concerned with finding an appropriate choice-theoretic model for explaining state and local government fiscal behavior. Economists have traditionally viewed state and local expenditure and tax decision-making processes "as if" they were the results of utility maximization subject to a budget constraint. This approach provides a convenient device for applying the neoclassical demand theory to state and local public sector fiscal behavior. The appropriateness of making such an assumption has, however, not been directly addressed in the literature. This research fills the gap by empirically testing whether the assumption of utility maximization holds in local public sector by using data drawn from Taiwan for the 1986-94 period. Taiwan's local public sector employment and spending data reflects weaker voter constraints on local bureaucracies, thus providing a unique opportunity for definitive direct tests of whether or not one can model bureaucratic behaviors as an "as if" constrained optimization outcome. Both parametric and nonparametric test procedures are performed. For parametric tests, a translog utility function is specified. For nonparametric tests, a method that is based on the theory of revealed preference is applied. Additional tests are also performed. The sensitivity analysis allows this dissertation study to test the robustness of the results from nonparametric tests. The probit analysis of jurisdiction-specific factors determining consistency with the revealed preference axioms provides additional insight into local public sector fiscal behavior in Taiwan. Overall results from this research provide a strong support for the assumption of bureaucratic utility maximizing behavior in Taiwan's local public sector. The empirical evidence not only supports the hypothesis that the local bureaucracies have well-defined preferences over public sector employment and spending, but also indicates the intertemporal stability in the preference structures across individual local public bureaucracies in Taiwan. This dissertation shows that the "as if" proposition in the public finance literature is justified. The results from this dissertation research therefore significantly provide the first definitive direct empirical support for this popular assumption in the literature.