a model of product line design and introduction sequence with reservation utility abstract cannibalization is a major concern for a firm when designing a product line in addition external options from outside the firm s product line may also play a significant role in this paper we investigate the impact of external options represented by reservation utility on product line design and introduction sequence we find that a heterogeneous reservation utility defines the relative attractiveness of segments and corresponding product line b reservation utility makes it more favorable to introduce products sequentially rather than simultaneously c aggregating segments is an effective way to mitigate cannibalization when it becomes too difficult to manage with different values of reservation utility across multiple segments and d introducing products in a non monotone order of quality can improve profit from simultaneous introduction when the value of reservation utility of a middle segment is particularly high

designing supply contracts contract type and information asymmetry this paper studies the value to a supplier of obtaining better information about a buyer s cost structure and of being able to offer more general contracts we use the bilateral monopoly setting to analyze six scenarios three increasingly general contracts wholesale pricing schemes two part linear schemes and twopart nonlinear schemes each under full and incomplete information about the buyer s cost structure we allow both sides to refuse to trade by explicitly including reservation profit levels for both for the supplier this is implemented through a cutoff policy we derive the supplier s optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts our key findings are as follows first the value of information is higher under two part contracts second the value of offering two part contracts is higher under full information and third the proportion of buyers the supplier will choose to exclude can be substantial

conglomerates and regulation conglomerates operating integrated productions in different regulated and unregulated sectors may benefit of scope economies however the precise size of these synergies is often unknown to both rival firms and regulators we show that the conglomerate s private information on scope economies may negatively affect both the regulated and the unregulated sectors depending on the precise nature of competition strategic substitutes or complements we also unveil a novel effect of regulation that involves an informational externality to the conglomerate s rivals notwithstanding these complications and independently of the nature of competition we show that in our model it is desirable as for welfare to let the firm run integrated productions unless diseconomies of scope may realize jel l51 l43 l52

simple contracts renegotiation under asymmetric information and the hold up problem abstract in this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non trivial it is argued that the default decision may be interpreted as a simple contract that the parties have written ex ante this result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold up problem to be solved even if the parties valuations are private information

ex post participation constraint in a principal agent model with adverse selection and moral hazard abstract this paper analyzes optimal contracting when an agent has private information before contracting and exerts hidden effort that stochastically affects the output additionally the contract is constrained to satisfy the agent s ex post participation we highlight three features of this model first the agent faces countervailing incentives second the separation of types is never optimal third the optimal constant bonus rewarding success is distorted downward below its efficient level

pollution claim settlements reconsidered hidden information and bounded payments abstract a principal s production decision imposes a negative externality on an agent the principal may be a pollution generating firm the agent may be a nearby town the principal offers a contract to the agent who has the right to be free of pollution then the agent privately learns the disutility of pollution finally a production level and a transfer payment are implemented suppose there is an upper bound possibly zero on payments that the agent can make to the principal in the second best solution there is underproduction for low cost types while there is overproduction for high cost types in contrast to standard adverse selection models of pollution claim settlements there may thus be too much pollution compared to the first best solution

procurement with specialized firms we analyze optimal procurement mechanisms when firms are specialized the procurement agency has incomplete information concerning the firms cost functions and values high quality as well as low price lower type firms are cheaper more expensive than higher type firms when providing low high quality with specialized firms distortion is limited and a mass of types earns zero profits the optimal mechanism can be inefficient types providing lower second best welfare win against types providing higher second best welfare as standard scoring rule auctions cannot always implement the optimal mechanism we introduce a new auction format implementing the optimal mechanism

executive constraint political stability and economic growth previous studies have argued that democracy diminishes the extent to which leadership contests depress economic growth by reducing the violence and uncertainty attendant on such contests we recon

x inefficiency competition and market information whether competition forces firms toward efficient behaviour is an open question we consider a duopoly with firms run by managers and affected by adverse selection on costs in contrast to recent literature we point out that to have a genuine effect on firm x inefficiency competition must change managerial incentives by introducing the availability of some signal on the rivals behaviour we show that if costs are correlated the contractual use of that signal can render private managerial information uninfluential this result stresses the informational role of the market and suggests scope for future work

pre sale information in markets as diverse as that for specialized industrial equipment or that for retail financial services sellers or intermediaries may earn profits both from the sale of products and from the provision of pre sale consultation services we study how a seller optimally chooses the costly quality of pre sale information next to the price of information and the product price and obtain clear cut predictions on when information is over and when it is underprovided even though we find that information quality does not satisfy a standard single crossing property buyers who are a priori more optimistic about their valuation end up paying a higher margin for information but a lower margin for the product when they subsequently exercise their option to purchase at a pre specified price

screening in a matching market contract design under incomplete information is often analysed in a bilaterally monopolistic setting if the informed party s reservation value does not depend on its private information its type it is a standard result that the uninformed side offers low types distorted contracts to reduce the information rent left to high types we challenge this result by embedding contract design in a matching market environment we consider a market where players meet pairwise and where in each match either side may be chosen to make a take it or leave it offer as frictions become sufficiently low we find that the set of equilibria is independent of whether there is complete or incomplete information in particular all contracts are free of distortions

the price of advice we develop a model of consulting advising where the role of the consultant is to reveal signals to her client that refine the client s original private estimate of the profitability of a project although the client can perfectly observe and evaluate these signals the consultant may only be able to do the same imperfectly or not at all this captures the idea that the expert may not fully understand the impact of her advice on the client we characterize the optimal contract between the consultant and her client it is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not the main result of the article is that in the optimal mechanism the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client s profit estimate

on countervailing incentives abstract this paper extends and unifies previous work on optimal contracts under countervailing incentives shedding light in particular on the relation between countervailing incentives and pooling inflexible rules our main result is that the nature of the optimal contract depends crucially on whether the agent s utility is quasiconcave or quasiconvex in the private parameter the optimal contract is separated in the former case and it may entail pooling in the latter case journal of economic literature classification number d82

extracting information or resource the hotelling rule revisited under asymmetric information we characterize the optimal extraction path when a concessionaire has private information on the initial stock of resource under asymmetric information a virtual hotelling rule describes how the resource price evolves over time and how extraction costs are compounded with information costs along an optimal extraction path in sharp contrast with the case of complete information elds which are heterogeneous in terms of their initial stocks follow di erent extraction paths some resource might be left unexploited in the long run as a way to foster incentives the optimal contract may sometimes be implemented through royalties and license fees with a market of concessionaires asymmetric information leads to a virtual her ndahl principle and to a new form of heterogeneity across active concessionaires under asymmetric information the market price converges faster to its long run limit exhibiting more stability

motivating with simple contracts abstract in practice incentive schemes are rarely tailored to the specific characteristics of contracting parties however according to economic theory optimal contracts should be highly dependent on individual conditions we reconcile these observations in the context of a principal agent model with both moral hazard and adverse selection motivating an agent could be increasingly costly to the principal because a more productive agent could also be more able to manipulate the terms of the contract as a result the principal may optimally pool some types by offering a contract with constant transfer and bonus we also explore parameterizations where the optimal contract is fully separating but simple contracts attain a significant portion of the optimal welfare

market participation in delegated and intrinsic common agency games we study how competition in nonlinear pricing between two principals sellers affects market participation by a privately informed agent consumer when participation is restricted to all or nothing intrinsic agency the agent must choose between both principals contracts and selecting her outside option when the agent is afforded the additional possibilities of choosing only one contract delegated agency competition is more intense the two games have distinct predictions for participation intrinsic agency always induces more distortion in participation relative to the monopoly outcome and equilibrium allocations are discontinuous for the marginal consumer under delegated agency relative to monopoly market participation increases respectively decreases when contracting variables are substitutes respectively complements on the intensive margin equilibrium allocations are continuous for the marginal consumer and the range of product offerings is identical to both the first best and the monopoly outcome

foreign direct investment and host country policies a rationale for using ownership restrictions abstract this paper examines host governments motivation for restricting ownership shares of multinational firms mnfs in foreign direct investment fdi projects an mnf with a productivity advantage is willing to invest in a host country the host government wants to capture the mnf s surplus yet cannot observe it due to the mnf s private information about its firm specific advantage in contrast a joint venture jv partner might observe this surplus depending on its ownership share the host government can alleviate its informational constraints by using ownership restrictions to force a jv this calls into question the wisdom of calls for liberalizing fdi flows by the wholesale elimination of domestic jv requirements we show that the optimal mechanism involves ownership restrictions that decrease as the size of the mnf s firm specific advantage increases

optimal pricing for selling a congestible good with countervailing incentives abstract we analyze optimal pricing when a monopolistic firm sells a good on a congestible network with countervailing incentives we show that the network capacity level is crucial to determine the optimal tariff

vertical restraints under asymmetric information on the role of participation constraints the impact on vertical contracting of a type dependent reservation utility is investigated within a sequential monopolies environment with asymmetric information the welfare and private properties of contracts controlling both the retail price and the sales level are compared with those restricting only sales when firms choose contracts non cooperatively retail price restrictions are desirable for the upstream supplier although detrimental to consumers whenever the retailer reservation utility has a relevant impact on optimal contracts if this impact is relatively weak and contracts are chosen cooperatively vertical price control fails to maximize firms joint profit although it would be beneficial to consumers

costly distortion of information in agency problems anecdotal evidence suggests that agents often spend resources distorting information transmitted to principals we present a model where costly information distortion emerges as equilibrium behavior the information structure we focus on is intermediate between and encompasses the cases of private information and public information the agent can falsify the privately observed state at some cost although the principal can design contracts that induce no falsification these may involve excessive iinformation rents falsification can be beneficial in spite of the waste of resources involved because it helps reduce information rents we examine how optimal contract and equilibrium payoffs change as the information structure ranges from private to public information

optimal border policies for invasive species under asymmetric information this paper analyzes the problem faced by a border protection agency if endogenous exporter abatement activities affect invasive species risk allowing for unobservable differences in abatement cost we show how the optimal inspection penalty regime differs from the symmetric information case departing from previous literature we allow for technical assistance a policy instrument specifically permitted and commonly employed under article 9 of the world trade organization sanitary and phytosanitary agreement we find the information asymmetry can make it optimal for the importing country to provide technical assistance grants for exporter risk abatement even if it would otherwise be inefficient further we show that fungibility of technical assistance with inputs in other sectors of the exporting economy affects the qualitative nature of optimal policy if technical assistance has no outside value in the exporter s country optimal policy is characterized by a menu of contracts balancing higher tariffs with lower penalties for being caught with an invasive if technical assistance can be used in other sectors of the exporter s economy it can introduce countervailing incentives making a uniform tariff penalty combination optimal

public goods with costly access abstract we examine the optimal allocation of excludable public goods with a private access cost that some consumers may not be able to afford the full information benchmark is presented first then individuals access costs and income levels are private information when high income consumers have low access cost asymmetric information increases the cost of subsidizing the poor for accessing the public good and inequality increases when the low access cost consumers have the lower income subsidizing the poor may involve countervailing incentives but inequality decreases finally monopoly provision exacerbates underprovision of the poor particularly of those with low access cost

control and contract design in research collaborations a complete contract perspective abstract incumbent firms especially in high tech industries often contract and collaborate with small research units on single projects a delicate resulting contracting decision thus is how to allocate control this paper considers the incumbent s problem to design a research contract that specifies the allocation of control the unit s research input and its monetary compensation contracting is complicated by the unit s private information about its technological skills research outputs also are not verifiable control affects the distribution of the private benefits from research and can be shared from a complete contract perspective an allocation of control that is contingent on the unit s reported information provides the incumbent an additional instrument for designing the incentives control can generate countervailing incentives and mitigate the limitations of contracts in research environments to the point of extracting the full surplus the analysis further clarifies when control is centralized by the incumbent when it is shared between the parties and when it is delegated to the unit

participation constraints in adverse selection models abstract this paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latter s reservation utility depends on his type the informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade the paper identifies conditions for the optimal contract to be separating to be nonstochastic and to induce full participation it also discusses the nature of the solution when bunching occurs the results are applied to nonlinear pricing under price cap regulation and bypass competition and to competition in nonlinear pricing journal of economic literature classification numbers d82 d42 d23 d78 l51 l15

cheap talk advertising and misrepresentation in vertically differentiated markets i consider a cheap talk model in which a firm has a chance to communicate its product quality to consumers the model describes how advertising can be both informative to consumers and profitable for the firm through its content in a vertically differentiated market i find that advertising content may be effective in inducing search even if incentives for misrepresentation exist in particular a firm with an undesirable low quality product is able to attract consumers who would have not incurred a search cost had they known its true quality in this case a semiseparating equilibrium occurs where the lowest firm types pool upward in order to increase the expected product quality while simultaneously signaling that the product is affordable although consumers always benefit from truth in advertising total welfare may decrease if an undesirable firm is required to reveal its type finally i show that the extent to which misrepresentation can take place increases with the cost of advertising coverage

optimal income tax under the threat of migration by top income earners we examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a mirrleesian economy an individual emigrates if his domestic utility is less than his utility abroad net of migration costs utilities and costs both depending on productivity a simple formula that complements saez s formula obtained in closed economy is derived for the marginal tax rates faced by top income earners it depends on the labour elasticity the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad the rawlsian marginal tax rates obtained for the whole population illustrate a curse of the middle skilled simulations are provided for the french economy

contractual distortions in a market with frictions abstract this paper analyses contract design in a decentralized market environment with frictions while principals e g firms have all contractual power their market power is constrained as agents e g workers can choose to wait and search for better offers we find that results depend crucially on how market frictions affect agents utilities with type independent costs of search and waiting equilibrium contracts are always first best if agents are impatient and discount future payoffs however distortions vanish only gradually in the latter case we also characterize equilibrium offers and show that the market exhibits two types of externalities both of which are absent in the case of type independent costs of search

multinationals tax competition and outside options abstract we analyze tax competition when a multinational firm has invested in two countries but also has an outside option e g towards a third country an interesting finding is that more attractive outside options for firms may constitute a win win situation the firm as well as its present host countries may gain when this occurs the reason that it benefits the host countries is that an enhanced outside option reduces the inefficiencies of tax competition an implication of the result is that better outside options for multinational firms may reduce the gains from host countries policy coordination and thus reduce those countries incentives to coordinate their policies also with a development where outside options become more accessible the perceived costs of tax competition e g in terms of underprovision of public goods may be overestimated our findings may also have implications for international negotiations since it provides an argument for mutual reduction of entry barriers as this may improve outside options

offshoring political myths and economic reality overseas outsourcing commonly known as offshoring is an aspect of globalisation that has attracted significant political and media attention in this lecture david smith discusses the phenomenon and examines the costs and benefits both to the companies and countries from which activities are being outsourced and to the host economy he concludes from a review of the evidence that there are indeed significant benefits and that they mainly accrue to the outsourcing country in the form of lower inflation faster growth in real incomes and an improved product ivity performance the shift to higher value added activities so why is there so much political sensitivity about offshoring one is that unlike in the case of manufacturing the jobs being offshored are commonly seen as those in which advanced economies retain comparative advantage another is that the new higher value added jobs that will be created are in areas and activities that barely exist at present the biggest problem he concludes is that while the victims of offshoring can be easily identified and have a political constituency the gains are spread more thinly across the economy this is the challenge for economists and pro free trade politicians

contracting with private knowledge of signal quality we characterize the optimal procurement contract in a setting where a supplier has privileged knowledge of the quality of a public signal about his production costs the optimal contract exhibits important differences with standard contracts in adverse selection settings for instance the contract induces output both above and below first best levels furthermore the induced output may not vary with the realized public signal unless the signal quality is sufficiently pronounced in addition output may increase as expected costs increase

socially optimal procurement with tight budgets and rationing abstract we investigate the behaviour of a social planner that secures the supply of a good e g an environmental benefit through contracting with private agents while the social planner seeks to maximise net social benefits she is also controlled with a fixed budget private agents are profit maximising and hold private information concerning their variable costs of production they also have known fixed costs of contracting we find that budget constraints and fixed costs change the optimal contract design in more than one way the social planner minimises costs rations high cost contracts to reduce fixed costs and information rents and distorts contracts for all agent types including low cost agents we find that rationing improves social welfare also even though social costs including tax distortion are explicitly taken into consideration they do not affect the design of optimal contracts when budgets are tight in those cases the budget constraint dominates the solution

internationally mobile firms and tax policy abstract this paper analyses how the government should tax internationally mobile firms the analysis finds that if tax authorities are unable to observe firms true mobility and domestic and foreign profitability are uncorrelated then 1 information rents are acquired by immobile inefficient firms and 2 the optimal policy will stimulate investment in the immobile sector compared to the complete information case another result of the paper is that the optimal allocation is implementable within the framework of a corporate income tax system where mobile firms self select more unfavourable capital allowances than immobile firms

entitling the pollutee liability versus standard under private information this paper considers and compares two different legal means full liability and standard to reduce and to regulate pollution at a local level accounting for private information about benefits and costs the familiar polluter pays principle makes the polluter liable for any damage since the courts lack information about the true damage the pollutee can and presumably will overstate this damage nevertheless voluntary arrangements bypassing the courts exist e g for coasean reasons however such out of court arrangements fail to improve in many cases the inefficient allocation of pollution due to agency costs given these unsatisfactory consequences of the polluter pays principle even after allowing for contracts around the law we propose a modification of standards the pollutee is entitled that a certain standard is satisfied yet can trade this right for financial compensations contracts induced by this legal rule are countervailing the optimal mechanism switches between subsidies and payments and first best efficiency holds at both ends and this characteristic allows such a privatized standard to track the first best quite well and often better than the polluter pays principle this relative ranking under private information is the opposite of the one that holds under uncertainty here liability dominates the standard

decentralization externalities and efficiency in the competitive model externalities lead to inefficiencies and inefficiencies increase with the size of externalities however as argued by coase these problems may be mitigated in a decentralized system through voluntary coordination we show how coordination is limited by the combination of two factors respect for individual autonomy and the existence of private information together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large moreover there are instances in which coordination cannot yield any improvement at all despite common knowledge that social gains from agreement exist this occurs when external effects are relatively small and this may help to explain why coordination is so seldom observed in practice when improvements are possible we describe how simple subsidies can be used to implement second best solutions and explain why standard solutions such as pigovian taxes cannot be used possible extensions to issues arising in the structure of research joint ventures assumptions in the endogenous growth literature and the location of environmental hazards are also described

competition for talent under performance manipulation abstract we study the effects of introducing competition for ceos assuming that the talent of ceos is not observable and that they can misreport their performance without competition for talent firms maximize their profits by offering inefficiently low powered incentive contracts competition for talent removes those inefficiencies but it leads to excessively high powered incentive contracts causing efficiency losses that can be more severe than the inefficiencies that competition mitigates if misreporting is not a concern however then competition for talent has unambiguously positive effects on efficiency

white certificates energy efficiency programs under private information of consumers abstract energy efficiency is an objective of public interventions at least since the public utility regulatory policy act of 1978 purpa recently conservation has received considerable attention in the united states and in particular in the european union but this time in order to mitigate global warming policy measures include regulations at the technical level and the introduction of white certificates in order to force utilities and firms to invest into conservation in a way similar to the already existing renewable energy quota this paper derives the optimal mechanism if utilities must deal with white certificates facing consumers holding private information the optimal mechanism has some theoretically interesting features like restricted participation and a discontinuity

the principal agent model with multilateral externalities an application to climate agreements we consider contracting of a principal with an agent if multilateral externalities are present the motivating example is that of an international climate agreement given private information about the willingness to pay wtp for emissions abatement due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation optimal contracts equalize marginal abatement costs and thus can be implemented by a system of competitive permit trading moreover optimal contracts can include a boundary part i e the endogenous type dependent participation constraint is binding which is not a copy of the outside option of no contract compared to this outside option a contract can increase emissions of the principal for types with a low wtp and reduce her payoff for high types subsidies can be constant or even decreasing in emission reductions and turn negative so that the agent reduces emissions and pays the principal

competition with exclusive contracts and market share discounts we analyze firms that compete by means of exclusive contracts and market share discounts conditional on the seller s share of customers total purchases with incomplete information about demand firms have a unilateral incentive to use these contractual arrangements to better extract buyers informational rents however exclusive contracts intensify competition thus reducing prices and profits and in all pareto undominated equilibria increasing welfare market share discounts by contrast produce a double marginalization effect that leads to higher prices and harms buyers we discuss the implications of these results for competition policy jel d43 d83 d86 k21 l14 l42 in this paper we study firms that compete by means of exclusive contracts or mar ket share discounts i e discounts that depend on the seller s share of a customer s total purchases these are common yet seldom studied forms of competition the literature has mainly focused on incumbents use of exclusive contracts or marketshare discounts to deter new entrants whilst paying less attention to competitors deploying similar pricing strategies we show that exclusive contracts intensify competition reducing equilibrium prices whereas market share discounts have a double marginalization effect and hence result in higher prices these findings have a bearing on the current lively policy debate 1 fueled by the fact that antitrust authorities view competition by means of exclusive contracts or marketshare discounts with some suspicion to say the least the authorities main concern appears to be that a dominant firm can use exclusivity or market share discounts to eliminate not only potential competitors but also existing ones a prime instance of this is the case of intel intel whose main competitor amd has been operating for years in the microchip sector offered electronics manufacturers discounts that depended on their buying a minimum share of their total purchases of microchips from intel some customers to qualify for the discount had to opt for an exclusive supply contract that

coordination and externalities abstract we analyze the gains of coordinating decisions in a regulatory framework in which agents are sovereign and tax inducements are socially costly we consider a general multi agent situation with externalities among agents incomplete information and type dependent reservation utilities when the regulator optimally leaves informational rents to the most efficient agents centralized coordination reduces global activity coordination induces more activity when the principal optimally leaves rents to the most inefficient agents last if we impose budget balance our mechanism can also be interpreted as the optimal auction of a public good with congestion externalities journal of economic literatureclassification numbers d62 d82 l51

optimal information transmission in a holdup problem this article examines the optimal contract in a bilateral trade model with unobservable relationship specific investment and renegotiation in such a setting a contract plays an additional role that it does not have in the standard holdup model namely that of transmitting information between the parties the article shows that a partial disclosure contract may be optimal and describes the optimal contract if the investment is cooperative and the information between the trading parties is asymmetric the optimal contract generally cannot result in the first best but dispensing with either of these assumptions makes the first best achievable

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

creating countervailing incentives through the choice of instruments abstract we analyze the relative efficiency of output and input incentive schemes in an agency model under adverse selection depending on the marginal rate of substitution between effort and productivity two cases of note may appear in the first one both incentive schemes imply the same ranking of agents regarding the productivity parameter in that case one instrument always dominates the other one whatever the agent s type in the second case the two schemes produce reverse rankings and the principal is always better off using a type dependent mixed strategy over the two incentive schemes if there is no restriction on mixed strategies the principal is able to implement the first best if the principal must use pure strategies she is still better off by offering contracts with type dependent monitoring instrument allowing the agent to choose the instrument enhances the principal welfare

the efficient mechanism for downsizing the public sector this article analyzes the efficient mechanism for downsizing the public sector focusing on adverse selection in productive efficiency each worker is assumed to have two type dependent reservation utilities the status quo utility in the public sector before downsizing and the utility that the worker expects to obtain by entering the private sector the efficient mechanism consists of a menu of probability of remaining in the public sector and transfer pairs that induces self selection a worker s full cost is defined by the sum of production cost in the public sector and reservation utility in the private sector it is optimal to start by laying off the agents with higher full cost when the public sector before downsizing is discriminating as the differential of private information about productive efficiency suggests there are countervailing incentives this makes the size of downsizing smaller under asymmetric information than under complete information