Public Policy (3): Decision Making

(1) Rational Choice Theory

When it comes to decision making, the “Rational Choice Theory” is frequently adopted. This assumption is derived from the notion that individuals act in their own best interests. Scholars consider that the preferences of individuals are both complete (i.e. one can rank all potential outcomes that result from a course of action) as well as transitive (i.e. if this individual prefers A to B, and B to C, then he or she will also prefer A to C).

Hindmoor (2006) suggests that the key assumptions of rational choice theory are:

• methodological individualism, accounting for outcomes in terms of individual choice;

• deductive methods using models to predict actions;

• behavioural rationality;

• self-interest;

• subjectivism (political individualism).

Externalities arise when market activities have consequences, either positive or negative, for people who are not party to those activities. Failure to deal with negative externalities means that some parties or even all suffer in the long run. For example, in the course of production, a manufacturer expels waste products up a chimney or into a watercourse. Direct neighbours but also proximate residents, fish populations, natural habitats, etc. suffer the consequences from it.

(2) Game Theory

"Game Theory" explored the logic of various situ­ations in which there are conflicts of indi­vidual interests. It devel­ops a variety of models in which issues are explored about the extent to which indi­vidu­als do best if they cooperate and those in which they ‘defect’, i.e. refuse to cooperate. It is possible to construct scen­arios in which there can only be one winner (zero sum), and games in which collab­or­a­tion logically brings the best result (posit­ive sum).

The prisoners' dilemma: Two prisoners who conspired to commit a crime are caught. They are put in separate cells and each told that if they confess they will receive a mild punishment. The dilemma for each is the fear that if the other confesses and they do not, this will result in a severe punishment for themselves. The optimum for both is strategy 4, but can they trust each other to stay silent in the face of the temptation to avoid a severe punishment?

(3) Principal-Agent Theory

The use of an economic model to theorise about public bureaucracy is closely related to what is described as principal-agent theory Jensen and Meckling, 1976), which focuses on situations in which the 'agent' - that is, the person or persons delegated authority, e.g. bureaucrats - has motives for disregarding the instruction of 'principals', e.g. legislature (Horn, 1995).

Principal and agent are interest-maximising and opportunistic. The self-interests of principal (i.e. elected official, who delegates a task) and agent (i.e. bureaucrat, who fulfills the delegated task) are divergent. The information about the skills and efforts needed to fulfil the task is distributed asymmetrically; the agent knows more than the principal.

The principal may thus select the wrong agent (i.e. “adverse selection” problem) and/or may not be able to punish the agent in office if this agent acts detrimentally to the interests of principal (i.e. “moral hazard” problem).

To solve these two agency problems, the principal has to develop specific tools and mechanisms such as ex ante screening of agents (e.g. competitive selection procedure to make agents reveal their qualities) or ex post control of agents (e.g. define clear performance indicator and financial incentives).

Title: The Public Policy Process (7th Edition)

Author: Michael Hill, Frédéric Varone

Year: 2016

Region: UK

Publisher: Routledge

Genre: Politics, Social Sciences

Score: 6.5/10