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
- 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.
- Government's control of a
public firm is lower than efficient; the control of private owners is efficient.
- The manager of a public firm
engages in less effort than efficient; in a privatized firm the manager's effort is chosen efficiently.
- 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.
- 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
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