Are Governmental Expenditures Also Sticky? Evidence from the Operating Expenditures of Public Schools

Abstract

Existing research on cost stickiness focuses primarily on for-profit companies. This study investigates cost behavior in the public sector, a new setting that deserves more research attention. Using unique data from public schools in Taiwan, we find that operating expenditures of public schools are sticky. Moreover, the stickiness is more prominent for schools whose principals facing higher enrollment pressure. These results support the public choice theory, suggesting that bureaucratic power may serve as a key driver leading to a sticky cost behavior for governmental organizations. The government auditors and congressional representatives monitoring governmental budgets should thus notice that bureaucrats might keep the level of expenditures just for their self-interests when demand declines, a manifestation of distortion in allocation of social resources.