Privatisation and X-Inefficiency: A Bargaining Approach

The usual analysis of privatisation and X-inefficiency uses agency theory to model managerial effort. We model worker effort as determined by a bargain between firms and workers. Workers dislike effort because it lowers utility. Firms prefer high effort because it raises productivity. Public sector firms are assumed to be social welfare maximisers and therefore, compared to private sector firms, they bargain lower effort levels since they have the interests of consumers and workers at heart. Our model predicts that under certain conditions privatisation should raise effort and so lower X-inefficiency, and that wages may increase or decrease.