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From Public Monopsony to Competitive Market: More Efficiency but Higher Prices

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Author Info
Josse Delfgaauw ()
Robert A. J. Dur ()

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Abstract

This paper examines the consequences of creating a fully competitive market in a sector previously dominated by a cost-minimising public firm. Workers in the economy are heterogeneous in their motivation to work in the sector. In line with empirical findings, our model implies that firms in the competitive market provide stronger monetary incentives to workers, reach higher productivity, and employ less workers than the public firm. Allocative efficiency therefore increases. Nevertheless, prices of the sector's output rise as competition between private firms for the best motivated workers leads to higher wage cost than under the public monopsony. Political support for liberalisation may therefore be limited.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1095.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1095

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Related research
Keywords: liberalisation; monopsony power; incentive wages; intrinsic motivation;

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Find related papers by JEL classification:
H40 - Public Economics - - Publicly Provided Goods - - - General
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General
L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hart, Oliver & Shleifer, Andrei & Vishny, Robert W, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1127-61, November.
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  2. Rafael La Porta & Florencio López-De-Silanes, 1999. "The Benefits Of Privatization: Evidence From Mexico," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1193-1242, November. [Downloadable!] (restricted)
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  3. Booth, Alison L & Zoega, Gylfi, 2002. "If You're so Smart, Why Aren't You Rich? Wage Inequality with Heterogenous Workers?," CEPR Discussion Papers 3190, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March. [Downloadable!] (restricted)
  5. V. Bhaskar & Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring. [Downloadable!] (restricted)
  6. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November. [Downloadable!] (restricted)
  7. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  8. Megginson, William L & Nash, Robert C & van Randenborgh, Matthias, 1994. " The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis," Journal of Finance, American Finance Association, vol. 49(2), pages 403-52, June. [Downloadable!] (restricted)
  9. William L. Megginson & Jeffry M. Netter, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June. [Downloadable!] (restricted)
  10. Haskel, Jonathan & Szymanski, Stefan, 1993. "Privatization, Liberalization, Wages and Employment: Theory and Evidence for the UK," Economica, London School of Economics and Political Science, vol. 60(238), pages 161-81, May. [Downloadable!] (restricted)
  11. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robert A. J. Dur & Amihai Glazer, 2004. "Optimal Incentive Contracts For a Worker Who Envies His Boss," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Josse Delfgaauw & Robert A. J. Dur, 2003. "Signaling and Screening of Workers' Motivation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Josse Delfgaauw & Robert A. J. Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  4. Margaretha Buurman & Robert Dur, 2008. "Incentives and the Sorting of Altruistic Agents into Street-Level Bureaucracies," Tinbergen Institute Discussion Papers 08-113/1, Tinbergen Institute. [Downloadable!]
    Other versions:
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