This paper presents a simple ratchet model. The ratchet effect, and the inability of the government to precommit credibly to given incentive schemes, are related to the fact that the government has monopsony power over managers, as is the case under market socialism where means of production are state-owned. But the introduction of a private sector of significant size gives an outside option to managers. Creating competition with the private sector is then a way to create credible commitment to public sector incentive schemes. Efficiency can be enhanced because of managers' interests in building a reputation on the managerial labour market, giving them the possibility of this outside option.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
655.
Find related papers by JEL classification: D29 - Microeconomics - - Production and Organizations - - - Other H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other P29 - Economic Systems - - Socialist Systems and Transition Economies - - - Other