Berlusconi and the Bureaucracy: An Analytical Approach

On May 5, the Berlusconi government approved the “Plan for Development” which implements the guidelines of the recently approved Document on the Economy and Finance, the economic policy program for the next three years. The document introduces changes in matters as diverse as tax and accounting rules, public-work tenders, research-funding for universities, employment incentives in southern Italy, tourism districts, the concession regime of  coastal lands (the concessions’ length time was raised to 90 years!) and a new plan for home renovation and building permits. The latter is quite interesting, since it is representative of the government’s approach on a serious matter: how to cope with the notoriously inefficient Italian public administration. In short, the Plan has (re) introduced the principle of “tacit consent” for building permits. If the administration is unable to comment (yes/no/under what conditions) on the permit-request within the time limit of 90-100 days (180-200 for cities with more than 100 thousand inhabitants), the permit is considered granted and the (eventual) violation of local building regulations is remitted (there are exceptions when the new buildings infringe environmental and landscape legislations). It would seem a provision of common sense: “why should the honest citizen always be victimized by a slow and inefficient bureaucracy?”  Well, a little economic thinking shows that there is very little common sense here. Below, I sketch a simple model that describes the behavior of a (potentially) unlawful real-estate builder and looks at the effects of the “silent-consent” rule. For those willing to skip the algebra, I summarize here the main conclusions. The “tacit-consent”:

1. Reduces the expected penalty for the law-infringer;

2. Hence it curtails the expected revenue for the public administration, resulting a transfer from (local) tax payers to the unlawful builders;

3. It raises the number of individuals who optimally choose to violate local building regulations;

4. The rule, while benefiting law-abiding builders by reducing waiting times, on the other hand penalizes them as taxpayers;

5. The government could have reduced administrative times at no cost, and without incurring in 1-4, simply by increasing penalties against illegal constructions while introducing the tacit consent rule.

Now replace the label “unlawful builder” with the label “potential law offender” and the term “administrative control” with the term “trial before the law”. What do you find?  The logic of the “tacit consent” is identical to the logic of the controversial “Justice Reform” (“processo breve” or “short trial”) being finalized in Parliament. The proposal (rather pompously entitled “Measures to protect the citizen against the indefinite duration of trials, in implementation of Article 111 of the Constitution and Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms) sets (different) time limits for sanctioning (different) criminal offenses.  If the Judiciary fails to reach a definitive sentence within the prescribed terms, the potential offender walks free. My conclusions, therefore, apply as well to this proposal.

The Model

Administrative controls occur randomly over time. Let X denote the random variable “waiting time for an administrative control”, and suppose that it follows an exponential distribution with density

image001_93.gif 

Hence the probability that the control takes place by time t is given by

image002_154.gif .

When t approaches infinity, the control is happens with probability one. Note that the so-called “hazard rate”, the probability that the control takes place in the next instant, if it has not yet occurred, is constant and equal to p. Under these assumptions, the average waiting time for a control is

image003_33.gif .

Let’s consider the potential unlawful builder at time t = 0, and denote by V the monetary value that he assigns to the new illegal construction.  In weighting cost and benefits, he must consider the possibility that,  if the control occurs at time t,  he will be have to pay a fine S (t). The individual is risk neutral and discount future payments at the rate

image004_88.gif .

The expected present value of the penalty is then given by:

image005_17.gif 

To lower administrative times, the government decides to introduce the rule of “tacit consent”: if the administration does not oblige within time T, the building will be considered lawful, and therefore no penalty will be required. However, if an inspection is carried out by T  and finds the abuse, a penalty S (t), possibly rising with the length of the abuse (at rate r ≥ 0), will be paid:  image006_49.gif , image007_05.gif

Under these assumptions the expected cost of the penalty is equal to

image008_34.gif 

From this expression one can easily see that:

1.      The expected sanction is greatest when there is no time limit for the sentence (when T tends to infinity), and it falls with T;

2.      The expected cost for the unlawful builder is (obviously) increasing in the initial sanction S and in its growth rate r.

3.      It is not necessarily true that the more efficient (the faster) is the administration, (i.e. the lower the average waiting time, 1 / p) the larger will be the revenue extracted from the offender. In fact, a penalty that is imposed earlier is also a smaller penalty:

image009_06.gif 

This shows that “silent consent” rule has the effects described in 1-5 above.