It is argued that incentives for employees in the public service agencies will necessarily be weak because of the multiple dimensions of products, multiple principals, incomplete contract, and socializing. Some empirical studies refer to incomplete contracting situations as part of the cause of the diminishing of the public sector. This work investigates the effects of privatization and ownership shares on incentive schemes for employees who work for public or privatized firms under incomplete contracting situations. Two main results are obtained. First, the incentive intensity of public firms decreases as the government has more ownership shares, and the social benefit declines. Second, privatized firms offer their employees higher-powered incentive contracts than do public firms.
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