Always the Last to Know? How Central Spending Controllers Handle Information Asymmetry

Information asymmetry is a phrase used to denote situations where one set of participants in a market, hierarchy, or other social settings will typically know more than the other(s) about the true state of affairs – sellers and buyers of used cars, for instance. Such asymmetry could be expected to be a central issue in planning and controlling public spending, given that there will normally be far fewer ‘controllers’ (for instance in parliaments or central finance ministries) than individuals or organizations subject to control. In the case of the UK, about 150-200 Treasury officials and about 900 National Audit Office staff work on spending control, as against half a million or so civil servants, plus several million public sectors who are not civil servants. So how do those spending controllers handle the information asymmetry issue? The classic McCubbins and Schwartz 1984 paper distinguished two approaches to handling information asymmetry in US Congressional oversight over the bureaucracy. One, dubbed ‘police patrol,’ meant routine surveillance and regular reporting to determine what was happening. In the other, more selective, approach, termed ‘fire alarms,’ legislators worked like a fire crew, leaving it to others to sound the alarm and heading for trouble spots as scandals broke and allegations/reports/complaints came in. However, this general approach overlooks other solutions that finance ministries use in practice to control spending. In this paper, we synthesize the findings from a six-year study of the history of the UK HM Treasury public expenditure control (which used interviews with 130 key players, classified archives, and official statistics) to identify other tools used by the organization to overcome information asymmetry. These include: the use of reviews, “togetherness”, appropriately set incentives, and opportunism. The paper explores each of these tools, arguing that information asymmetry often linked to political relationships.