Some questions from Kalle's lecture on bureucracies and his model in Moene (1986) (almost identical to exercise for Seminar 4):
The bureau has preferences U(X,Z) over activity X and slack Z where Z=B-C(X). Society's utility of activity is given by W(X)=(1/γ)Xγ, and the bureau's budget is given by B. We always have B<=W(X).
Assume here that U(X,Z)=XβZ1-β and C(X)=αX+C0.
- Calculate the socially optimal bureau. What are appropriate values for γ?
- Calculate the bureau's X and B that exploit the situation with a complete information monopoly
- Calculate X and B when the bureau chooses X for a given B and the politicians choose B given X=F(B) (where F is the optimal reaction of the bureau)
- Discuss how this specific utility function can be interpreted as the outcome of conflict of interest between zealots (climbers), who prefer a large bureaucracy, and conservers, who prefer leasure and slack on the job.
- Assume now that social welfare depends on national income R, so W=W(X;R). Assume that W'X is increasing in R. What does this mean, and does it seem like a plausible assumption? How are X and B affected by an increase in R?