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Monitoring and Productive Efficiency in Public and Private Firms

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  • Anke S. Kessler
  • Christoph Lülfesmann

Abstract

The paper compares productive efficiency in public and private firms. We study a principal-agent model in which the firm's manager is privately informed about a cost parameter and exerts unobservable cost reducing effort, while the owner can conduct costly audits to obtain information about the firm's cost. Without auditing, managerial effort (and therefore production efficiency) is strictly higher under public governance with a benevolent government. However, if auditing is possible, a profit-maximizing private owner always audits at least as frequently as a public principal. For small auditing costs, we find that monitoring decisions, managerial effort and welfare under both governance structures coincide. Conversely, when audits becomes more expensive, the public (but not the private) owner refrains from monitoring, and the private firm may produce more cost efficiently.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 58 (2001)
Issue (Month): 2 (February)
Pages: 167-

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200202)58:2_167:mapeip_2.0.tx_2-r

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References

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  1. Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
  2. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," Munich Reprints in Economics 19776, University of Munich, Department of Economics.
  3. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
  4. Schmitz, Patrick W., 2000. "Partial Privatization and Incomplete Contracts: The Proper Scope of Government Reconsidered," MPRA Paper 13447, University Library of Munich, Germany.
  5. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 911-30, July.
  6. Kessler, Anke S., 2000. "On Monitoring and Collusion in Hierarchies," Journal of Economic Theory, Elsevier, vol. 91(2), pages 280-291, April.
  7. De Fraja, Giovanni, 1993. "Productive efficiency in public and private firms," Journal of Public Economics, Elsevier, vol. 50(1), pages 15-30, January.
  8. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Schmidt, Klaus M., 1996. "The costs and benefits of privatization: An incomplete contracts approach," Munich Reprints in Economics 19773, University of Munich, Department of Economics.
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Cited by:
  1. Laura Di Giorgio & Massimo Filippini & Giuliano Masiero, 2012. "The impact of the institutional form on the cost efficiency of nursing homes," Quaderni della facoltà di Scienze economiche dell'Università di Lugano, USI Università della Svizzera italiana 1203, USI Università della Svizzera italiana.
  2. Dalen, Dag Morten & Moen, Espen R, 2003. "The Proper Scope of Governments When Costs are Contractible," CEPR Discussion Papers 3992, C.E.P.R. Discussion Papers.
  3. Matthew Ellman, 2006. "Does privatising public service provision reduce accountability?," Economics Working Papers 997, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Bischoff, Ivo, 2002. "Efficiency-enhancing effects of private and collective enterprises in transitional China," Discussion Papers 9, Justus Liebig University Giessen, Center for international Development and Environmental Research (ZEU).

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