Explaining Bureaucratic Optimism: Theory and Evidence from U.S. Executive Agency Macroeconomic Forecasts

Abstract

We offer a theory of intertemporal bureaucratic decision making which proposes that an agency's forecast optimism is related to the extent to which it discounts future reputation costs associated with bureaucratic incompetence. Agency forecasts of the distant future are more likely to be optimistic than short-term forecasts. We claim that unstable organizations will discount reputation costs at a steeper rate than stable organizations, and therefore will produce more optimistic forecasts. We test our theory using macroeconomic forecasts produced by the Office of Management and Budget (OMB) and the Social Security Administration (SSA) across six forecast horizons from 1979 to 2003. The statistical results are generally consistent with our theory: OMB generates more optimistic long-term forecasts than SSA. Further, differences in forecast optimism between these executive branch agencies widen as the forecast horizon increases. Our evidence suggests that more stable agencies place a premium on minimizing reputation costs. Conversely, less stable agencies are more likely to accommodate political pressures for forecast optimism. These findings underscore the importance of institutional design for understanding how executive agencies balance the conflicting goals of political responsiveness and bureaucratic competence within the administrative state.