The Effects of Hierarchy, Centralization and Formalization on Municipal Fiscal Health : An Empirical Test of the Bureaucratic Ideal

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 U.S. It utilizes data from a national survey of top appointed city officials in the U.S. 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 composite bureaucracy index, and addressing unobserved heterogeneity and possible simultaneity bias through least squares dummy variable regression and instrumental variable regression, the empirical analysis shows that excessive bureaucracy leads to poorer fiscal health. Analyzing 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 budgetary solvency