Working Paper: CEPR ID: DP655
Authors: Gerard Roland; Khalid Sekkat
Abstract: This paper presents a simple ratchet model. The ratchet effect, and the inability of the government to precommit credibly to given incentive schemes, are related to the fact that the government has monopsony power over managers, as is the case under market socialism where means of production are state-owned. But the introduction of a private sector of significant size gives an outside option to managers. Creating competition with the private sector is then a way to create credible commitment to public sector incentive schemes. Efficiency can be enhanced because of managers' interests in building a reputation on the managerial labour market, giving them the possibility of this outside option.
Keywords: market socialism; ratchet effect; managerial labour market
JEL Codes: 029; H39; P29
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government's monopsony power over managers (J42) | Increased managerial slack (D25) |
| Absence of a competitive managerial labor market (J42) | Increased managerial slack (D25) |
| Private sector existence (L39) | Enhanced credibility of government's commitment to optimal incentive plans (M52) |
| Sufficient private sector (H42) | Effective competition for managerial talent (L19) |
| Private sector size (L25) | Overall performance of public sector management (H83) |
| Ratchet effect (E32) | Concealment of skills by managers (D83) |
| Lower effort incentive schemes (J33) | Concealment of skills by managers (D83) |