Keywords: Productive Efficiency,
Privatization, Monitoring
JEL-Classification: D23, L23, L33
The paper
compares productive efficiency in public and private firms. We study a
principal-agent model in which the firm's manager is privately informed about a
cost parameter and exerts unobservable cost reducing effort, while the owner
can conduct costly audits to obtain information about the firm's cost. Without
auditing, managerial effort (and therefore production efficiency) is strictly
higher under public governance with a benevolent government. If auditing is
possible, however, a profit-maximizing private owner always audits at least as
frequently as a public principal. For small auditing costs, we find that
monitoring decisions, managerial effort and welfare under both governance
structures coincide. Conversely, when audits becomes more expensive, the public
(but not the private) owner refrains from monitoring, and the private firm may
produce more cost efficiently.
Copyright 1999 © A. Kessler