Adaptation processes in public agencies: Uncertainty and dynamic capabilities in local governments

This dissertation introduces the notion of adaptive efficiency into public sector research. In comparison with neoclassical economics, the chapters try to steer the focus away from equilibrium analysis to the discussion of processes and specific adaptation dynamics. The introductory chapter provides a simple utility-maximizing model that introduces risk aversion and uncertainty into the decision to contract out for public services. It illustrates how variance in private output performance can substantially alter the contracting decision when risk averse governments make short-run decisions without perfect knowledge. The second part of this dissertation more explicitly develops the idea of adaptive efficiency of government agencies in an evolutionary framework, applying it to a neglected adaptation property of federalism. The last chapter utilizes an evolutionary computer simulation that enables testing of several hypotheses derived from Chapter 2 about federalism as an adaptation mechanism. Higher decentralization will lead to a wider set of explorable knowledge in the system, but information specificities can put limits on the successfulness of innovation and imitation. The results of the simulations indicate the importance of specifying the exact elements and interactions in the process of adaptive efficiency. The implications for government reform therefore have to be analyzed on a case by case basis. Broad-based policies will overlook the interactions and long-run dynamics that are created and propagated and could condemn policy proposals that are in substance beneficial but have just not considered all unintended consequences and interactions.