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Labor Market Information Acquisition and Downsizing


  • Doh-Shin Jeon
  • Jean-Jacques Laffont


We study the optimal mechanism for downsizing the public sector which takes into account different informational constraints (complete versus asymmetric information on each worker's efficiency) and political constraints (mandatory versus voluntary downsizing). Under complete information, the optimal structure of downsizing (who is laid-off and who is not) does not depend on the political constraint and is determined by the (marginal) cost of retaining a worker in the public sector. Since this cost includes his opportunity cost in the private sector, information acquisition on opportunity costs affects the structure of downsizing. Under asymmetric information, the political constraints determine which workers obtain information rents and therefore affect the structure of downsizing. An increase in the precision of the information on workers' opportunity costs may increase or decrease social welfare depending on its impacts on the information rents. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.

Suggested Citation

  • Doh-Shin Jeon & Jean-Jacques Laffont, 2006. "Labor Market Information Acquisition and Downsizing," Review of Development Economics, Wiley Blackwell, vol. 10(3), pages 347-366, August.
  • Handle: RePEc:bla:rdevec:v:10:y:2006:i:3:p:347-366

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    References listed on IDEAS

    1. Chong, Alberto & Lopez-de-Silanes, Florencio, 2002. "Privatization and labor force restructuring around the world," Policy Research Working Paper Series 2884, The World Bank.
    2. Estache, Antonio & Laffont, Jean-Jacques & Zhang, Xinzhu, 2004. "Downsizing with labor sharing and collusion," Journal of Development Economics, Elsevier, vol. 73(2), pages 519-540, April.
    3. Mathias Dewatripont, 1992. "Economic Reform and Dynamic Political Constraints," ULB Institutional Repository 2013/175991, ULB -- Universite Libre de Bruxelles.
    4. Alderman, Harold & Canagarajah, Sudharshan & Younger, Stephen, 1995. "A Comparison of Ghanaian Civil Servants' Earnings before and after Retrenchment," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 4(2), pages 259-288, October.
    5. M. Dewatripont & G. Roland, 1992. "Economic Reform and Dynamic Political Constraints," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 703-730.
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    Cited by:

    1. Jeon, Doh-Shin & Menicucci, Domenico, 2008. "Money, fame and the allocation of talent: Brain drain and the institution of science," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 558-581, June.

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