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The Efficient Mechanism for Downsizing the Public Sector

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  • Jeon, Doh-Shin
  • Laffont, Jean-Jacques

Abstract

This article analyzes the efficient mechanism for downsizing the public sector, focusing on adverse selection in productive efficiency. Each worker is assumed to have two type-dependent reservation utilities: the status quo utility in the public sector before downsizing and the utility that the worker expects to obtain by entering the private sector. The efficient mechanism consists of a menu of probability (of remaining in the public sector) and transfer pairs that induces self-selection. A worker's full cost is defined by the sum of production cost in the public sector and reservation utility in the private sector. It is optimal to start by laying off the agents with higher full cost. When the public sector before downsizing is discriminating as the differential of private information about productive efficiency suggests, there are countervailing incentives. This makes the size of downsizing smaller under asymmetric information than under complete information. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Jeon, Doh-Shin & Laffont, Jean-Jacques, 1999. "The Efficient Mechanism for Downsizing the Public Sector," World Bank Economic Review, World Bank Group, vol. 13(1), pages 67-88, January.
  • Handle: RePEc:oup:wbecrv:v:13:y:1999:i:1:p:67-88
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    Cited by:

    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. Alberto Chong & Florencio de, 2003. "The Truth about Privatization in Latin America," Yale School of Management Working Papers ysm436, Yale School of Management.
    4. Cremer, Helmuth & Laffont, Jean-Jacques, 2003. "Public goods with costly access," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1985-2012, September.
    5. 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.
    6. Alberto Chong & Virgilio Galdo, 2006. "Streamlining and Privatization Prices in the Telecommunications Industry," Economica, London School of Economics and Political Science, vol. 73(291), pages 461-484, August.
    7. Milan Vodopivec, 2004. "Income Support for the Unemployed : Issues and Options," World Bank Publications, The World Bank, number 14922.
    8. Heinz, Matthias & Drzensky, Frank, 2013. "The Hidden Costs of Downsizing," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79764, Verein für Socialpolitik / German Economic Association.
    9. Josse Delfgaauw & Robert Dur, 2004. "Incentives and Workers’ Motivation in the Public Sector," CESifo Working Paper Series 1223, CESifo Group Munich.
    10. Doh-Shin Jeon & Joel Shapiro, 2004. "Downsizing, job insecurity and firm reputation," Economics Working Papers 795, Department of Economics and Business, Universitat Pompeu Fabra.
    11. Eric Maskin, 2004. "Jean-Jacques Laffont: A Look Back," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 913-923, September.
    12. Alberto Chong & Virgilio Galdo, 2003. "La racionalización y los precios de la privatización en el sector de las telecomunicaciones," Research Department Publications 4320, Inter-American Development Bank, Research Department.
    13. repec:cuf:journl:y:2014:v:15:i:2:chong:lopez-de-silanes is not listed on IDEAS
    14. Alberto Chong & Florencio Lopez-de-Silanes, 2003. "La privatización y la reestructuración de la fuerza laboral en todo el mundo," Research Department Publications 4330, Inter-American Development Bank, Research Department.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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