Organizational incentives and efficiency

01 06 2025

There is a lot of talk right now about the efficiency of the US government and how some rich guys are going to parachute in and fix it by firing a bunch of people (see, DOGE). While this approach may sound overly simplistic, my years of observing organizational behavior suggest it may have merit, despite its obvious drawbacks. Organizational inefficiency in the government is certainly rampant and why shouldn't it be? I've yet to hear of or see any large organization that doesn't have inefficiencies.

Why? Well as any organization (private or public) increases in size past a certain point, the individual reward of each worker becomes further and further separated from their work. Once an organization is beyond ~10 people, individual incentives shift to where workers are better suited to act in their own best interests rather than the company's (or the country's).

How you see this pan out is that those in charge generally want to increase the size of their organizations and command larger budgets, as this sets them up well for future promotions. Of course annual budgets are always spent as not doing so would mean a budget cut in the next year. Any opportunity to hire more workers or increase budgets is jumped on, whether or not a project needs more resources. Over time it is obvious how this leads to bloated organizations and low efficiency.

While that pattern is likely something you've seen before, it is not unique to the private sector. For example in a recent op-ed in the NYT, John F. Sopko, Special Inspector General for Afghanistan Reconstruction, describes the same cycle of perverse incentives that pushed leaders to make inefficient decisions in Afghanistan to win promotions and raises. And despite hundreds of reports of these systemic problems over the last 12 years, the funding kept coming and the project (rather, war) kept going on.

All this raises many questions:

1. Is it possible to design incentives differently to make organizations more efficient? Is there an upper bound on how efficient they can be?
2. Is it possible to have large organizations that violate Pareto's Law (20% of the people do 80% of the work) or Price's Law (\(\sqrt{workers}\) do 50% of the work)?
3. Is high efficiency impossible at scale and thus regular layoffs/firings are the only way to reduce inefficiency?
4. Is the private sector actually more efficient that the public sector? If yes, how much of that efficiency is solely due to being smaller?
5. Even though all governments are (mostly) run by self-serving individuals, how do some governments create prosperous economies and enviable average living conditions, while others are crippled by never-ending cycles of corruption, poverty, and violence?

The broadly applicable nature of this problem makes it a highly interesting one and one where small improvements could lead to massive benefits. Of course the answers might be unsatisfying (i.e. no large organizations are inherently inefficient, individual country success is primarily random) but it is still worth asking.

This entry was tagged as economics tech management