In a market economy that works according to profit incentives with state-owned means of production or `market socialism' managerial careers are available only in the state sector, and the government is a monopsonist. Able managers can conceal their skills to enjoy rents from lower effort, while incentive schemes reveal their abilities and therefore allow the government to reduce their future rewards. In Discussion Paper No. 655, Research Fellow Gérard Roland and Khalid Sekkat maintain that this `ratchet effect' strengthens the incentive for managerial slack. If managerial incentives are paid out of society's net product, pooling good and bad managers is the best policy, even for a very reform-minded government, if there are insufficient means to pay managers enough to reveal their skills. This may account for the failure of profit-oriented reforms in the former socialist countries that left their ownership structures unchanged.

Roland and Sekkat maintain that introducing a private sector enhances career opportunities for public sector managers by giving them an outside option. This enables the government to make credible its commitment to its incentive scheme, by imposing on itself the discipline of competition with the private sector. If the government can thereby raise efficiency within the public sector, the existence of a private sector of adequate size can therefore be viewed as a `commitment device' for the public sector incentive scheme. Even under market socialism, the government may have an interest in introducing decentralized competition for managers to match individual managers to the assets for which they are most suitable. Without such matching, however, competition for managers is a zero-sum game to the government: even if individual firms want to commit to incentive schemes to keep their good managers, the government will be tempted to redefine such schemes once it acquires information about managers' talents.

Roland and Sekkat draw three conclusions from their model. First, introducing the market to the post-socialist countries is not enough to yield the intended efficiency effects. Second, in an economy with a significant public sector, managers' ability to change careers at different points in time may significantly improve performance. Third, the post-socialist countries must rapidly develop a private sector in order to create competition for managerial services and must set up intertemporal wage structures in a manner that ensures that the private sector alternative always remains potentially attractive to public sector managers.

Market Socialism and the Managerial Labour Market
Gérard Roland and Khalid Sekkat

Discussion Paper No. 655, May 1992 (AM)