Description: “The Economics of the Organization of the Public Sector – Incentive aspects of internal organization and privatization”
The topic gives a short introduction to the economics of organization and applies it to the organization of the public sector. The topic starts out from the idea that modes of organization are best viewed as systems, and that building blocks of these systems support and reinforce each other. It is, for example, clear that strong monetary incentives and freedom in completing tasks complement each other in providing appropriate over-all incentives for a worker. A similar complementarity exists between weak monetary incentives and relatively rigid rules for a worker’s doings. A key insight is that either arrangement is appropriate under certain sets of circumstances.
This basic idea is introduced and extended to privatization of public-sector activities, and competition in the provision of public services. A major distinction is made between the public sector’s “contracting out” activities while retaining control over the activities on the one hand, and the public sector’s introducing competition and choice at the consumer level by means of voucher-type arrangements on the other. Some evidence from contracting out and school competition will be discussed.
As an application of the organizational-choice approach to public-sector activities, the distinguishing features of non-profit enterprises are discussed, and the question whether such enterprises are able to cover important middle ground in a restrained-competition public sector is raised.
Teaching methods and examination
The topic will be covered during four lectures devoted mainly to presentation of the material; some exercises will be discussed in class. The basic theory will be covered in two lectures at the beginning of the course by Eric Rehn, and the applications to privatization and other organizational choices by the public sector will be covered in two lectures at the end of the course by Fredrik Andersson. The course requirements include writing a short paper, and each student must write a paper within one of the three topics. The papers covering the topic “The Economics of the Organization of the Public Sector – Incentive aspects of internal organization and privatization” will be the subject of a seminar on October 20.
Lectures 1-2: Background and basics on organizational choice
Taught by Eric Rehn
The first lecture is an introduction to the basic ideas of “organizational regimes” and a fundamental trade-off between effort and cooperation. Following an informal introduction, some mathematical modeling will be introduced.
Main readings: Williamson; Dixit (with Andersson as an add-on).
Lecture 3-4: Organizational choice, privatization and competition
Taught by Fredrik Andersson
These core lectures deal with the implications of organizational trade-offs for privatization and public-sector competition. The importance of structural pre-conditions and contracts will be stressed. The last lecture covers some theory and evidence on incentives and performance in non-profit enterprises.
Main readings: Domberger and Jensen; Hoxby; Glaeser and Shleifer.
Lecture 5: Seminar
*’s indicate compulsory readings that will be covered in class.
*Andersson, F. (2002) “Notes on Dixit’s Incentives and organizations
in the public sector: An interpretative review.”
*Dixit, A. (2000). ”Incentives and organizations in the
public sector: An interpretative review.” Manuscript,
*Domberger, S. and P.
Jensen (1997). ”Contracting out by the public sector: Theory,
*Glaeser, E. and A. Shleifer (2001). ”Not-for-profit entrepreneurs.” Journal of Public Economics 81: 99-115.
Hart, O., Shleifer, A. and Vishny, R. (1997), ”The proper scope of government: Theory and an application to prisons”, Quarterly Journal of Economics 112: 1127-61.
Holmström, B. and P. Milgrom (1991). ”Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design”, Journal of Law Economics and Organization 7: 24-52.
Holmström, B. and P. Milgrom (1994). ”The firm as an incentive system”, American Economic Review 84: 972-91.
*Hoxby, C. (2002). ”School choice and school
productivity (or, could school choice be a tide that lifts all boats?)” In The
Economic Analysis of School Choice, C. Hoxby, ed. Forthcoming,
Roomkin, M. and B. Weisbrod (1999). ”Managerial compensation and incentives in for-profit and nonprofit hospitals.” Journal of Law, Economics and Organization 15:750-81.
*Williamson, O. (1998). ”Public and private bureaucracies: A transaction cost economics perspective.” Journal of Law, Economics and Organization 15:306-42.