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Privatization, Bureaucracy, and Risk Aversion


  • Leyden, Dennis Patrick
  • Link, Albert N


The role of governmental risk aversion in the decision to privatize the production of goods and services has not been examined closely. Using a model of a risk-averse, single-service Niskanen bureaucrat, the authors determine the conditions under which a bureaucrat will prefer to privatize rather than produce in-house. If the private-sector firm is risk neutral, the result will be a fixed-fee contract with complete insurance. If the private-sector firm is risk averse, the result will be a cost-plus contract with the degree of cost sharing determined by the bureaucrat's share of total risk aversion. In both cases, the bureaucrat's sponsor may affect the likelihood of privatization by manipulating the rewards and penalties imposed on the bureaucrat. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Leyden, Dennis Patrick & Link, Albert N, 1993. "Privatization, Bureaucracy, and Risk Aversion," Public Choice, Springer, vol. 76(3), pages 199-213, July.
  • Handle: RePEc:kap:pubcho:v:76:y:1993:i:3:p:199-213

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    Cited by:

    1. Dennis Leyden & Albert Link, 2014. "Research Risk and Public Policy in a Knowledge-Based Economy: the Relative Research Efficiency of Government Versus University Labs," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 5(2), pages 294-304, June.
    2. Christophe Gence-Creux, 2000. "Regulation with a Risk-Averse Principal," Econometric Society World Congress 2000 Contributed Papers 0588, Econometric Society.

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