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. Copyright 1999 by Oxford University Press.