The effects of hierarchy, centralization and formalization on municipal fiscal health: An empirical test of the bureaucratic ideal
| Author | Benedict S. Jimenez |
| Published date | 01 September 2017 |
| DOI | http://doi.org/10.1111/padm.12327 |
| Date | 01 September 2017 |
ORIGINAL ARTICLE
The effects of hierarchy, centralization
and formalization on municipal fiscal health:
An empirical test of the bureaucratic ideal
Benedict S. Jimenez
Department of Political Science, Northeastern
University, Boston, MA, USA
Correspondence:
Benedict S. Jimenez, Department of Political
Science, Northeastern University,
360 Huntington Avenue, Boston, MA 02115,
USA.
Email: bensj@outlook.com
This research examines the effects of three defining features of
bureaucratic organizations –hierarchy, centralization of decision-
making, and the formalization of administrative procedures and
rules –on the fiscal health of city governments in the US. It uti-
lizes data from a national survey of top appointed city officials in
the US to measure the bureaucratic features of city governments,
and assesses budgetary solvency using actual financial data from
audited financial reports. Using factor analysis to develop a com-
posite bureaucracy index, and addressing unobserved heterogene-
ity and possible simultaneity bias through least squares dummy
variable regression and instrumental variable regression, the empir-
ical analysis shows that excessive bureaucracy leads to poorer fis-
cal health. Analysing the effects of the individual components of
the index, the results indicate that centralization and formalization
exert a statistically significant and negative effect on city budget-
ary solvency.
1|INTRODUCTION
One of the enduring questions in the field of public administration is whether bureaucracy contributes to the effec-
tive functioning of government (Hill and Lynn 2005; Olsen 2006; Pollitt 2009). A century’s worth of theoretical and
empirical literature, not only in public administration but also in organization theory and public choice, reveals an
organizational puzzle: bureaucracy, it seems, is simultaneously efficient and dysfunctional, a tower of control but
also an incubator of conflict, inflexible yet expeditious in decision-making (Barnard 1938; Weber 1946; Fayol 1949;
Mechanic 1962; Cyert and March 1963; Downs 1967; Thompson 1967; Alchian and Demsetz 1972; Jensen and
Meckling 1976; Williamson 1985; Hill and Lynn 2005; Olsen 2006; Pollitt 2009).
This study examines the role of bureaucracy in the fiscal health of city governments in the US. The focus here
is on budgetary solvency, which refers to the capacity of a government to raise adequate revenues to pay for the
costs of delivering public services, and to meet other financial obligations such as debt servicing in a fiscal year
(Jimenez 2009; Hendrick 2011). The ideal-type bureaucracy has several features (Weber 1946), and this study
DOI: 10.1111/padm.12327
Public Administration. 2017;95:791–806. wileyonlinelibrary.com/journal/padm © 2017 John Wiley & Sons Ltd 791
focuses on key characteristics of bureaucratic organizations, specifically hierarchy, centralization of decision-making,
and the formalization of administrative procedures and rules. As Pollitt (2009, p. 199) notes, bureaucracy, at its
basic, is a ‘career organization with continuous central authority …The written record is at the core of operations,
and hierarchically defined rules and precedents are the bedrock of continuity and consistency in bureaucratic deci-
sion making.’
This research contributes to the perennial debate about the effects of administrative structure, rules, and pro-
cesses on government performance. It explores a critical question with implications on both theory and policy: Do
hierarchy, centralized decision-making, and formalized rules help improve budgetary solvency in city governments?
To answer this question, the study uses the results of two major data-gathering efforts; specifically, a national sur-
vey of top appointed officials in cities in the US with a population of 50,000 or more, and the collection and coding
of city audited financial reports. Using factor analysis to develop a composite bureaucracy index, and addressing
unobserved heterogeneity and possible simultaneity bias through least squares dummy variable regression and
instrumental variable regression, the analysis shows that excessive bureaucracy leads to poorer fiscal health. Analys-
ing the effects of the individual components of the index, the results indicate that a high degree of centralization
and formalization, not hierarchy, exerts a stronger negative effect on budgetary solvency.
The study is organized as follows: The next section briefly reviews recent empirical literature on hierarchy, cen-
tralization and formalization. This is followed by a discussion of the possible effects of these bureaucratic features
on municipal fiscal health. Succeeding sections explain the research methodology, discuss the results of the analysis,
and explore the implications of the findings for both theory and practice.
2|EMPIRICAL LITERATURE
Olsen (2006) aptly describes the conflicting views on bureaucracy. On one hand, public administration is criticized
for being ‘not bureaucratic enough’, that is, rules are regularly breached, orders are ignored, and bureaucrats are not
held accountable. On the other hand, public administration is also criticized for being ‘excessively bureaucratic’
because, among others, ‘rules are followed too slavishly’(Olsen 2006, pp. 4–5). These seemingly contradictory views
are reflected in the results of extant empirical research investigating the effects of bureaucratic features such as
hierarchy, centralization and formalization, on various dimensions of government performance. Hierarchy refers to
‘a stable set of relations in which the positions are arrayed in a pattern of formally superior–subordinate authority
links’(O’Toole and Meier 1999, p. 505). Centralization of decision-making occurs when ‘the power to make deci-
sions is exercised at the upper levels of the organizational hierarchy’(Andrews et al. 2009, p. 58). Formalization
refers to ‘rules covering the rights and duties of positional incumbents and procedures for dealing with work situa-
tions’(Hall 1963, p. 33) that are specified in official records and govern the whole organization (Brewer and Walker
2009; Pollitt 2009). How these bureaucratic features influence government performance has been explored in both
the public administration and public choice literatures.
Research in public administration employing organizational-level analysis has produced inconsistent evidence
on the effects of bureaucratic features, with some studies reporting insignificant findings, and others reporting
either significant positive or negative correlations with different dimensions of government performance ranging
from employee rule-following, employee alienation, accomplishment of an organization’s mission, perceived organi-
zational effectiveness, and service improvement (see, among others, DeHart-Davis and Pandey 2005; Moynihan
and Pandey 2005; Andrews et al. 2009, 2012; Brewer and Walker 2009; DeHart-Davis 2009; Wright and Pandey
2010; and Meier et al. 2010).
Much of the empirical literature in public administration has ignored the possible role of hierarchy, centraliza-
tion and formalization in explaining the fiscal health of public organizations. Public choice literature, in contrast,
explores how centralization of the budgetary process influences fiscal outcomes in the public sector. Most of this
research focuses on national governments as the unit of analysis, and examines fragmentation of authority in the
792 JIMENEZ
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