Production Costs and Output Qualities in Public and Private Employment Agencies

Abstract

IN a recent article, C. M. Lindsay hypothesized government enterprises provide goods and services with nonoptimal output characteristics.' By nonoptimal he means publicly produced output lacks certain attributes (ones are too costly for congressmen or citizens to monitor) normally found in comparable but privately produced output. When attributes are not easily observed, the monitoring authorities find it difficult to reward public managers for providing them. As a result, government managers devote few, if any, resources to their production. Private firm managers, in contrast, will furnish such attributes provided a sufficient number of customers are willing to pay for them. Reasoning along these lines, Lindsay predicts that when proprietary and government enterprises confront identical demand functions, systematic differences in the behavior of these two types of organizations will be observed. The output of government enterprises will, in general, contain fewer of those attributes which are 'invisible' to Congress, is, whose presence and quantity are not monitored.2 The purpose of this article is to test this hypothesis, using data drawn from a sample of public and private employment agencies.