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Public Versus Private Production Decisions and Redistribution

Author

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  • Jukka Pirttilä
  • Matti Tuomala

    (School of Management, University of Tampere)

Abstract

We analyse the decision rules governing public employment policy and capital allocation between private and public sector in a simple two-type and two-sector optimal non-linear income tax model with endogenous wages. Results from a static framework indicate that to produce a given amount of consumption the government should employ more unskilled workers and less skilled workers than is necessary to minimize cost at the prevailing gross wage rate. The potential role of minimum wage as another policy variable is discussed as well. Extending the model into an OLG framework with public and private capital, we show that the discount rate that ought to be used in evaluating public sector projects is not the same as the return to capital in the private sector. In particular, public capital accumulation is favoured if capital in the private sector is complementary with high-skilled labour. Therefore, production efficiency holds neither in public employment decision nor capital allocation.

Suggested Citation

  • Jukka Pirttilä & Matti Tuomala, 2002. "Public Versus Private Production Decisions and Redistribution," Working Papers 0211, Tampere University, Faculty of Management and Business, Economics.
    • Handle: RePEc:tam:wpaper:0211
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    File URL: http://urn.fi/urn:isbn:951-44-5503-7
    File Function: First version, 2001
    Download Restriction: no
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    Cited by:

    1. Eero Lehto, 2006. "The Choice Between the In-house Provision and the Competitive Out-house Provision of Public Services," Working Papers 216, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.

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