SFB 303 Discussion Paper No. A - 551

Author: Kessler, Anke S., and Lülfesmann
Title: Adverse Selection and Monitoring: On the Productive Efficiency in Private and Public Firms
Abstract: The paper compares productive efficiency in public and private firms in a two-stage adverse-selection model with managerial effort. At a first stage, the respective principal (welfare-maximizing public decisionmaker, or private owner) can build up a variable size monitoring technology. At stage 2, she proposes a labor contract to a manager who has private information on his intrinsic productivity. If monitoring devices have been installed at stage 1, this contract may include a minimum-effort requirement. We show that, under the optimal monitoring and contracting decisions, the public principal may refrain from auditing, while the private principal monitors. In that case, equilibrium effort and thus productive efficiency may be higher in a private firm. Conversely, in situations where both principals monitor in the equilibrium of the game, effort and welfare levels under both governance structures coincide.
Creation-Date: 1997
Unfortunately the paper is not available. Please contact author(s).

SFB 303 Homepage

19.05.1998, Webmaster