Business Subsidies and Bureaucratic Behaviour

The study attempts to apply William Niskanen's (1971) theory of budget maximising bureaucrats to the business subsidies policy implemented in Finland, by one of the major distributor of subsidies to firms, the ministry of Trade and Industry (KTM). The empirical analysis is based on records of 15 300 firms applying for aid through the KTM regional offices during 1995-1999 and on the budgeted appropriations given to the KTM between 1989 and 2000. In testing Niskanen's theory we examine whether its four assumptions are relevant and applicable within the context of the KTM?s business subsidies policy. First, information asymmetry is found to exist between the KTM and its sponsor (the ministry of Finance VM). Second, bilateral monopoly is also evident between the two parties. Third, the VM does not seem to play a passive role during the budget negotiations with the KTM, as Niskanen assumed. The fourth assumption - the budget maximising bureaucrat - is tested by examining (a) the strategies of the KTM bureaucrats in attempting to maximise their bureau's budget and (b) the success in their budget maximisation efforts. Looking at the budget maximisation strategies, our analysis shows that the bureaucrats? request for funds is not based on the previous year's appropriations, as initially hypothesised. However, we find strong evidence suggesting that bureaucrats attempt to get rid of unallocated funds before year's end in order to avoid receiving less the following years. Finally, our logistic regression analysis indicates that bureaucrats pursue a "creaming" policy where only firms that have better chances of success, receive more subsidies. That way, they can reduce the chances of the policy not achieving its goals, thus avoid the risk of having later deductions in the program's budget. In testing the success of the bureaucrats? budget maximisation efforts, we note that, despite that subsidy appropriations have fluctuated during the examined period, administrative expenses (including salaries) have stayed flat or grown to some degree. Although this is not a causal finding, it suggests that bureaucrats have succeeded in - at least - safeguarding the appropriations which are of major importance to them. Among others, the study recommends that direct subsidies to firms should be reduced further, and be substituted by advanced advisory services, subsidised loans and forgivable loans.