Labour Market Information Acquisition and Downsizing

Doh-Shin Jeon and Jean-Jacques Laffont

No 43, Working Papers from Barcelona School of Economics

Abstract: We study the optimal mechanism for downsizing the public sector which takes into account different informational constraints (complete versus asymmetric information on each workerís efficiency) and political constraints (mandatory versus voluntary downsizing). Under complete information, the optimal structure of downsizing (who is laid-off and who is not) does not depend on the political constraint and is determined by the (marginal) cost of retaining a worker in the public sector. Since this cost includes his opportunity cost in the private sector, information acquisition on opportunity costs affects the structure of downsizing. Under asymmetric information, the political constraints determine which workers obtain information rents and therefore affect the structure of downsizing. An increase in the precision of the information on workers' opportunity costs may increase or decrease social welfare depending on its impacts on the information rents.

Keywords: Downsizing; Information acquisition; Asymmetric Information; Blackwell's Theorem; Public Sector (search for similar items in EconPapers)
Date: 2003-09
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Journal Article: Labor Market Information Acquisition and Downsizing (2006)
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