DP1192 Privatization and X-Inefficiency: A Bargaining Approach

Author(s): Jonathan Haskel, Amparo Sanchis
Publication Date: June 1995
Keyword(s): Bargaining, Privatization, X-inefficiency
JEL(s): J50, L33
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1192

The usual analysis of privatization and X-inefficiency uses agency theory to model managerial effort. We model worker effort as determined by a bargain between firms and workers. Workers dislike effort because it lowers utility. Firms prefer high effort because it raises productivity. Public-sector firms are assumed to be social welfare maximizers and compared to private-sector firms, therefore, they bargain lower effort levels since they have the interests of consumers and workers at heart. Our model predicts that under certain conditions privatization should raise effort and so lower X-inefficiency, and that wages may increase or decrease.