The Efficient Mechanism for Downsizing the Public Sector |
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| Authors: | Jeon, Doh-Shin Laffont, Jean-Jacques |
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| Affiliation: | Doh-Shin Jeon is with the Groupe de Recherche en Economic Mathématique et Quantitative at the Université de Toulouse I in France, and Jean-Jacques LaffontInstitut is with the Institut d'Economic Industrielle and the Atelier de Recherche Quantitative Appliquée au Développement Economique at the Université de Toulouse I. The authors thank Martin Rama and an anonymous referee for helpful comments and suggestions. |
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| Abstract: | This article analyzes the efficient mechanism for downsizingthe public sector, focusing on adverse selection in productiveefficiency. Each worker is assumed to have two type-dependentreservation utilities: the status quo utility in the publicsector before downsizing and the utility that the worker expectsto obtain by entering the private sector. The efficient mechanismconsists of a menu of probability (of remaining in the publicsector) and transfer pairs that induces self-selection. A worker'sfull cost is defined by the sum of production cost in the publicsector and reservation utility in the private sector. It isoptimal to start by laying off the agents with higher full cost.When the public sector before downsizing is discriminating asthe differential of private information about productive efficiencysuggests, there are countervailing incentives. This makes thesize of downsizing smaller under asymmetric information thanunder complete information. |
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