SFB 303 Discussion Paper No. A - 252

Author: Bös, Dieter, and Wolfgang Peters
Title: A Principal-Agent Approach on Manager Effort and Control in Privatized and Public Firms
Abstract: In this paper we obtain the following results of a transition from public to private ownership:
  1. The public firm sets prices according to an inverse elasticity rule, where the chosen price-cost margin also depends on the particular mix of the multiple goals. Marginal-cost pricing is only chosen if the simple sum of consumer and producer surplus is maximized. Privatization implies a move to monopoly pricing.
  2. Government's control of a public firm is lower than efficient; the control of private owners is efficient.
  3. The manager of a public firm engages in less effort than efficient; in a privatized firm the manager's effort is chosen efficiently.
  4. The reward to the manager of a public firm is more differentiated than efficient. In the case of an unfavorable economic environment the reward is lower than efficient. In the case of a favorable environment the reward is higher than efficient. On the other hand, the manager in a privatized firm is always rewarded efficiently.
  5. It is irrelevant whether the public manager is incompletely informed about the particular mix of the government's multiple objectives as long as the government chooses the incentive-compatible reward for the manager.
Creation-Date: 1989
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