From Public Monopsony to Competitive Market: More Efficiency But Higher Prices

22 Pages Posted: 28 Jan 2004

See all articles by Josse Delfgaauw

Josse Delfgaauw

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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Date Written: December 2003

Abstract

This paper examines the consequences of creating a fully competitive market in a sector previously dominated by a cost-minimising public firm. Workers in the economy are heterogeneous in their motivation to work in the sector. In line with empirical findings, our model implies that firms in the competitive market provide stronger monetary incentives to workers, reach higher productivity, and employ fewer workrs than public firms. Allocative efficiency therefore increases. Nevertheless, the prices of the sector's output rise as competition between private firms for the best motivated workers leads to higher wage costs than under the public monopsony. Political support for liberalisation may therefore be limited.

Keywords: liberalisation, monopsony power, incentive wages, intrinsic motivation

JEL Classification: H4, J3, J4, L2, L3, L5

Suggested Citation

Delfgaauw, Josse and Dur, Robert, From Public Monopsony to Competitive Market: More Efficiency But Higher Prices (December 2003). Available at SSRN: https://ssrn.com/abstract=357340 or http://dx.doi.org/10.2139/ssrn.357340

Josse Delfgaauw (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

FEW / H 8-15
P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31-10-4082159 (Phone)
+31-10-4089161 (Fax)

HOME PAGE: http://people.few.eur.nl/dur

Tinbergen Institute

Amsterdam/Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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