Abstract

This paper studies the wasteful effect of bureaucracy on the economy
by addressing the link between opportunistic behavior of government
bureaucrats and the public sector wage bill. In particular, public officials
are modeled as individuals competing for a larger share of those
public funds. A simple extraction technology in the government administration
is introduced in a standard real-business-cycle setup augmented
with detailed public sector. The model is calibrated to German
data for the period 1970–2007. The main findings are: (i) the model
performs well vis-a-vis the data; (ii) due to the existence of a significant
public sector wage premium and the high public sector employment, a
substantial amount of working time is spent in opportunistic activities,
which, in turn, leads to significant losses in terms of output; and (iii)
the model-based loss measures obtained for the EU-12 countries are
highly correlated to indices of bureaucratic inefficiency.