Residual Claimancy and Monitoring for
Regulating Multiple Agents*
Shinji Kobayashi
Graduate School of Economics Nihon University
Shigemii Oba
Graduate School of Economics Nihon University
January 2009
Abstract
In this paper we examine the optimal incentive contracts with
two-dimensional uncertainty in which a government selects residual
claimancy and monitoring instrument under a decentralized or a consolidated industry structure. We consider the same quality of public
facilities supplied by a government in the two di¤erent regions. In each
region, these facilities are procured from a …rm which has private information about the cost. We show that optimal industry structure is
contingent on residual claimancy and monitoring instrument.
1
Introduction
We consider the same quality of public facilities, such as toll expressways,
supplied by a government in the two di¤erent regions. In each region, these
facilities are procured from a …rm which has private information about the
cost. We focus on the following three issues. The …rst issue is industry structure: decentralization versus consolidation. The second issue is privatization
versus nationalization. The third issue is optimal monitoring instrument.
We analyze three industry structures. The …rst structure is a decentralized industry in which the government procures the facilities from two
separate …rms. The second structure is a consolidate industry with a decentralized organization. The government procures from a single …rm, the
*Preliminary
1
organization of which is decentralized. The third structure is a consolidate
industry with an integrated organization. The government procures from a
single …rm, the organization of which is integrated. Analyzing the privatization versus nationalization, we assume that the government can determine
residual claimancy. When the …rm is privatized, it seeks pro…t and is a residual claimant. When the …rm is nationalized, it does not seek pro…t and the
government is a residual claimant. Analyzing the optimal monitoring instrument, we assume the government can decide to implement input monitoring
or output monitoring.
In either structure, we show, the government prefers to be a residual
claimant and implement input monitoring. Furthermore, we show that the
optimal industry structure is contingent on who is a residual claimant and
which of monitoring instruments is implemented. For instance, when implementing output monitoring, the government prefers a consolidated industry
with a decentralized organization. A decentralized industry yields the intermediate payo¤ and a consolidated industry with an integrated industry
yields the lowest payo¤ for the government.
This paper is related to the literature on information integration and
decentralization. Dana (1993) analyzes the identical optimal problem. He
concludes that the optimal industry structure is contingent on whether two
production costs are su¢ ciently positively correlated or not. Also, Baron,
Besanko (1992), Gilbert and Riordan (1995) analyze the optimal problem,
in which a producer composes a …nal output from two inputs provided by
one or two suppliers. They conclude that the optimal supplier contract is
contingent on the degree of complementarity or substitutability between the
two inputs.
This paper is also related to Khalil and Lawarree (1995). They explore
the asymmetric information model where a principal can design a residual
claimant and a monitoring instrument. They analyze the four cases contingent on residual claimancy and monitoring instrument. They conclude that
input monitoring with a principal as a residual claimant yields the highest
payo¤ and that input monitoring with an agent as a residual claimant yields
the lowest. Also, regardless of who is a residual claimant, output monitoring
yields the intermediated payo¤.
We are motivated by the fact that Japanese state-owned gigantic monopolistic companies have been privatized and divided under the Administrative
and Fiscal Reforms since the end of the twentieth century. In 1985 Nippon
Telegraph and Telephone Public Corporation was privatized and in 1999 this
privatized company was divided into the two regional companies. In 1987
Japan National Railways was privatized and divided into the seven regional
railway companies. Furthermore, in 2005 Japan Highway Public Corpora2
tion (JH) was divided into the three privatized expressway companies and a
government institution.
This paper is organized as follows. In Section 2, we present the model
and basic assumptions. In Section 3, we characterize the optimal contracts
under the three industry structures. In each structure, we analyze four cases
contingent on a residual claimant and a monitoring instrument. In Section
4, we make comparative analyses about these three structures. In Section 5,
we conclude.
2
Model
We consider the public facilities which are supplied by a government in two
di¤erent regions: region A and B. In each region, the government procures
these facilities, the quality of which is …xed, from a …rm. The facilities yield
R
S
and revenue ; which are observable and veri…able, in
consumer surplus
2
2
each region. The …rm’s production cost depends on the productivity , which
is determined by the regional environment, and the …rm’s cost reduction
e¤ort e: The cost function is given by
C=
e;
where we have with 2 f 1 ; 2 g and 0 < 1 < 2 : Probability distribution
over 1 or 2 is respectively p or 1 p with 0 < p < 1: We denote the
productivities in region A and B as iA and jB respectively with i; j = 1 or
2: For simplicity, we assume iA and jB are independent. The …rm’s cost
e2
reduction e¤ort e is the disutility for the …rm given by (e) = . These
2
parameters and e are the …rm’s private information.
We analyze two industry structures. One structure is a decentralized
industry. The government procures from two …rms, each of which produces
the facility in the respective region. The other structure is a consolidated
industry. The government procures from a single …rm which produces the
facilities in the two separate regions. Under the consolidated industry, the
…rm is assumed to have either a decentralized organization or an integrated
organization. With a decentralized organization, the …rm exerts e¤ort in the
2
2
eA
eB
ij
ij
two regional divisions and its disutility is given by
+
: With an
2
2
integrated organization, the …rm exerts e¤ort in an integrated division and
(eij )2
its disutility is given by
:
2
3
Under each structure, the government can determine a residual claimant
(the government or the …rm) and a monitoring instrument (input or output).
When the government is a residual claimant, it obtains the pro…t, R C.
When the …rm is a residual claimant, it obtains the pro…t. With input
monitoring, the government can observe e and enforce the optimal e¤ort
level. With output monitoring, the government can verify the realized cost.
We suppose the following timing of events:
(Stage 1) The government decides on an industry structure (a decentralized industry, a consolidated industry with a decentralized organization or a
consolidated industry with an integrated organization). Also, the government
determines a residual claimant (a government or a …rm) and a monitoring
instrument (input or output monitoring).
(Stage 2) In each region, nature decides on the regional productivity
and the …rm responsible for each region observes it.
(Stage 3) The government o¤ers a contract contingent on what is monitored. The …rm signs the contract if it guarantees at least reservation utility.
(Stage 4) The …rm exerts cost reduction e¤ort e.
(Stage 5)The …rm completes the production and the cost C is realized.
At the end of this stage, the monetary transfer between the government and
the …rm is realized.
3
Optimal Contracts under the Three Industry Structures
In this section, under the respective industry structure, we analyze the government’s optimal contract for the following four cases:
Case 1: Government is a residual claimant and monitors …rm’s e¤ort.
Case 2: Government is a residual claimant and monitors …rm’s cost.
Case 3: Firm is a residual claimant and its e¤ort is monitored.
Case 4: Firm is a residual claimant and its cost is monitored.
3.1
3.1.1
Decentralized Industry
Government as Residual Claimant
Case 1: Input Monitoring The government’s problem is to maximize
X
A
B
B
G
eB
=S+R
pij ( iA eA
ij + tij + j
ij + tij ):
The government faces with the following interim incentive compatibility constraints:
4
X
and
"
eA
1j
2
2
2
pi1 tB
i1
eB
i1
2
p1j tA
1j
X
"
#
X
#
X
"
eA
2j
2
pi1 tB
i2
eB
i2
2
p1j tA
2j
"
2
2
#
#
;
and the following individual rationality constraints:
eA
2j
2
B
ei2
2
tA
2j
tB
i2
and
2
0
2
0:
Rewriting the problem with the binding conditions and taking the …rst order
B
conditions with respect to eA
ij and eij ; we obtain
B
fb
eA
= 1:
ij = eij = e
GI
The government’s expected payo¤
GI
=S+R
2p
is given by
2(1
1
p)
2
+ 1:
Case 2: Output Monitoring The government’s problem is identical.
It faces with the following interim incentive compatibility constraints and
individual rationality constraints:
X
"
eA
1j
2
2
2
pi1 tB
i1
eB
i1
2
p1j tA
1j
X
"
#
X
#
X
eA
2j
2
B
ei2
2
tA
2j
and
tB
i2
5
"
e^A
2j
2
pi1 tB
i2
e^B
i2
2
p1j tA
2j
"
2
0
2
0;
2
2
#
#
A
B
where we have ebA
bB
2 + 1 and e
2 + 1 . Rewriting the
2j = e2j
i2 = ei2
problem with the binding conditions and taking the …rst order conditions
B
with respect to eA
ij and eij ; we have
B
B
A
eA
11 = e12 = e11 = e21 = 1
and
Since 0 < e and 0 < eA
2j
2
+
1
= eB
i2
2
GO
=S+R
2
GO
2
2
<1
1
The government’s expected payo¤
3.1.2
p
B
A
B
eA
21 = e12 = e22 = e22 = 1
1
+
1;
p
(
1 ):
2
we must satisfy
p:
is given by
+1+
p
1
p
(
2
2
1) :
Firm as Residual Claimant
Case 3: Input Monitoring The government’s problem is to maximize
X
F
=S+
pij ijA + ijB
subject to
X
"
R
p1j
2
"
X
R
pi1
2
(
(
1
1
2
eA
1j )
eA
1j
2
2
eB
i1 )
eB
i1
2
A
1j
B
i1
#
#
X
X
p1j
pi1
"
"
2
R
2
R
2
(
(
1
1
eA
2j )
eA
2j
2
eB
i2 )
eB
i2
2
2
A
2j
2
eA
R
2j
A
A
( 2 e2j )
0
2j
2
2
2
eB
R
i2
B
B
and
( 2 ei2 )
0:
i2
2
2
Rewriting the problem with the binding conditions and taking the …rst order
B
condition with respect to eA
ij and eij , we have
B
fb
= 1:
eA
ij = eij = e
The government’s payo¤
FI
FI
is represented as
=S+R
6
2
2
+ 1:
B
i2
#
#
Case 4: Output Monitoring The government’s problem is identical.
It faces with the following interim incentive compatibility constraints and
individual rationality constraints:
X
"
R
p1j
2
"
X
R
pi1
2
(
1
(
1
2
eA
1j )
eA
1j
2
2
eB
i1 )
eB
i1
2
R
2
R
2
and
A
1j
B
1j
(
X
#
pi1
eA
2j
2
eB
i2
2
eB
i2 )
2
p1j
X
eA
2j )
2
(
#
"
"
R
2
(
R
2
(
1
1
eA
2j )
e^A
2j
2
eB
i2 )
e^B
i2
2
2
A
2j
2
2
A
2j
0
B
i2
0:
2
A
B
where we have ebA
bB
2 + 1 and e
2 + 1 . Rewriting the
2j = e2j
i2 = ei2
problem with the binding conditions and taking the …rst order conditions
B
with respect to eA
ij and eij ; we obtain
A
B
B
eA
11 = e12 = e11 = e21 = 1
p
B
A
B
and eA
21 = e12 = e22 = e22 = 1
Since 0 < e and 0 < eA
2j
2
+
1
= eB
i2
2
The government’s payo¤ is
FO
3.1.3
FO
=S+R
2
<1
1
1
+
p
(
1 ):
2
we must satisfy
1;
p:
is given by
2
2
+1+
p
1
p
(
2
2
1) :
Comparison
By the comparison of the government’s payo¤s, we have
GO
and
GI
FI
FI
p
=
1 p
= 2p( 2
7
(
2
1)
2
1)
> 0:
>0
B
i2
#
#
Since
2
1
GI
<1
GO
p; we have
= p(
1)
2
1
2
(
1
p
=
FO
2
1)
<
GI
> p(
1)
2
> 0:
We conclude that
FI
3.2
3.2.1
GO
<
:
Consolidated Industry with Decentralized Organization
Government as Residual Claimant
Case 1: Input Monitoring The government’s problem is to maximize
X
G
B
=S+R
pij ( iA eA
eB
ij + j
ij + tij ):
The government faces with the following ex post incentive compatibility constraints:
2
eA
1j
+ eB
1j
2
2
eA
+ eB
i1
i1
2
A 2
e11 + eB
11
2
t1j
ti1
and t11
2
t2j
2
ti2
2
t22
eA
2j
2
2
+ eB
2j
2
2
2
eA
+ eB
i2
i2
2
2
A 2
e22 + eB
22
:
2
Since the …rm can coordinate its announcement, we have the last constraint.
The individual rationality constraint is represented by
eA
22
2
2
+ eB
22
0:
t22
2
Rewriting the problem with the binding conditions and taking the …rst order
B
conditions with respect to eA
ij and eij ; we have
B
jb
eA
ij = eij = e = 1:
The government’s payo¤
GI
GI
is given by
=S+R
2p
1
8
2(1
p)
2
+ 1:
Case 2: Output Monitoring The government’s problem is identical.
It faces with the following ex post incentive compatibility constraints and
individual rationality constraints:
eA
1j
t1j
ti1
t11
2
2
+ eB
1j
2
A 2
ei1 + eB
i1
2
2
eA
+ eB
11
11
2
e^A
2j
2
+ eB
2j
2
2
A 2
ei2 + e^B
i2
2
2
A 2
e^22 + e^B
22
2
t2j
2
ti2
2
t22
eA
22
2
2
2
+ eB
22
and t22
0;
2
B
A
bB
where we have ebA
2 + 1.
2 + 1 and e
i2 = ei2
2j = e2j
We have two scenarios whether the last incentive compatibility constraint
is binding or not. When the last constraint is not binding, we have
B
A
B
eA
11 = e11 = e12 = e21 = 1
p
B
A
B
and eA
21 = e12 = e22 = e22 = 1
The government’s payo¤
GO1
GO1
(1
p)2
(
2
1 ):
is given by
=S+R
2
p
(
1 p
When the last constraint is binding, we obtain
2
+1+
2
2
1) :
B
A
B
A
B
eA
11 = e11 = e12 = e21 = e21 = e12 = 1
p
B
( 2
and eA
1 ):
22 = e22 = 1
(1 p)2
Since 0 < e and 0 < eA
22
2
+
2
The government’s payo¤
GO2
Since
GO1
<
GO2
; we have
2
+
1;
we must satisfy
(1 p)2
:
p2 p + 1
is given by
1
GO2
=S+R
= eB
22
1
<
p (p2
2 2+1+
(1
GO2
=
GO
9
:
p + 1)
(
p)2
2
2
1) :
3.2.2
Firm as Residual Claimant
Case 3: Input Monitoring The government’s problem is to maximize
X
F
=S+
pij ij
subject to
R
(
eA
1j )
1
R
R
(
(
R
(
(
(
(
i
(
eA
22 )
eB
i1 )
(
(
(
1
1
2
eA
i1
eB
i2 )
eB
11 )
1
eA
1j
eB
2j )
j
1
eA
22 )
1
2
(
eA
i2 )
eA
11 )
1
R
and R
eA
i1 )
(
j
eA
2j )
1
i
R
(
eB
1j )
eA
11
eB
22 )
2
1j
2
2j
2
2
+ eB
i1
2
A 2
ei2 + eB
i2
2
2
i1
2
i2
2
+ eB
11
2
2
eA
+ eB
22
22
2
eA
22
eB
22 )
2
+ eB
1j
2
2
+ eB
eA
2j
2j
2
2
+ eB
22
2
11
2
22
2
22
0:
Rewriting the problem with the binding conditions and taking the …rst order
B
conditions with respect to eA
ij and eij ; we obtain
B
fb
= 1:
eA
ij = eij = e
The government’s payo¤
FI
FI
is represented as
=S+R
10
2
2
+ 1:
Case 4: Output Monitoring The government’s problem is identical.
It faces with the following ex post incentive compatibility constraints and
individual rationality constraints:
R
(
eA
1j )
1
R
R
(
(
R
(
(
(
1
(
eA
22 )
(
e^B
i2 )
1
eA
11
eB
11 )
1
e^A
22 )
eA
i1
eB
i1 )
(
(
eB
2j )
j
1
eA
i2 )
i
2
(
(
eA
11 )
1
R
and R
eA
i1 )
(
j
e^A
2j )
1
i
R
(
eA
1j
eB
1j )
e^B
22 )
1
eB
22 )
2
2
2
+ eB
1j
2
2
e^A
+ eB
2j
2j
2
2
1j
2
2j
2
+ eB
i1
2
A 2
ei2 + e^B
i2
2
2
i1
2
i2
2
+ eB
11
2
A 2
e^22 + e^B
22
2
2
eA
22
2
+
2
22
2
+ eB
22
2
B
A
bB
where we have ebA
2 + 1 and e
i2 = ei2
2j = e2j
Since the last constraint is binding, we have
11
22
1.
B
A
B
A
B
eA
11 = e11 = e12 = e21 = e21 = e12 = 1
p
B
( 2
and eA
1 ):
22 = e22 = 1
(1 p)2
Since 0 < e and 0 < eA
22
2
+
2
The government’s payo¤
FO
=S+R
FO
1
= eB
22
1
<
2
+
1;
we must satisfy
(1 p)2
:
p2 p + 1
is given by
2
2+1+
11
p (p2
(1
p + 1)
(
p)2
2
2
1) :
0:
3.2.3
Comparison
By the comparison of the government’s payo¤s, we have
and
Also, since
GI
2
GO
1
<
= p(
GO
FI
GI
FI
p (p2
(1
= 2p( 2
=
p + 1)
( 2
p)2
1 ) > 0:
2
1)
>0
(1 p)2
; we have
p2 p + 1
2
1)
2
p2 p + 1
(
(1 p)2
<
GO
1)
2
> p(
2
1)
> 0:
We conclude that
FI
3.3
3.3.1
=
FO
<
GI
:
Consolidated Industry with Integrated Organization
Government as Residual Claimant
Case 1: Input Monitoring The government’s problem is to maximize
X
G
=S+R
pij ( i + j eij + tij ):
The government faces with the following ex post incentive compatibility constraints and individual rationality constraint:
t1j
ti1
t11
(e1j )2
2
(ei1 )2
2
(e11 )2
2
t2j
ti2
t22
(e2j )2
2
(ei2 )2
2
(e22 )2
2
(e22 )2
0:
2
Rewriting the problem with the binding conditions and taking the …rst order
conditions, we have
eij = 1:
and
t22
12
GI
The government’s expected payo¤
GI
=S+R
2p
is given by
2(1
1
p)
2
1
+ :
2
Case 2: Output Monitoring The government’s problem is identical.
It faces with the following ex post incentive compatibility constraints and
individual rationality constraints:
(e1j )2
2
(ei1 )2
2
(e11 )2
2
t1j
ti1
t11
t2j
ti2
t22
(^
e2j )2
2
(^
ei2 )2
2
(^
e22 )2
2
(e22 )2
0:
2
where we have eb2j = e2j
bi2 = ei2
2 + 1 and e
Since the last constraint is binding, we obtain
and
t22
e11 = e12 = e21 = 1
2p
and e22 = 1
(
(1 p)2
Since 0 < e and 0 < e^22 = e22
2
2
The government’s payo¤
GO
3.3.2
GO
=S+R
+
1
1;
<
2
2
+
1.
1 ):
we have
(1 p)2
:
p2 + 1
is given by
1 p(1 + p2 )
2 2+ +
(
2
(1 p)2
2
2
1) :
Firm as Residual Claimant
Case 3: Input Monitoring The government’s problem is to maximize
X
F
=S+
pij ij
13
subject to
R
(
R
R
1
+
( i+
(
1+
j
1
1
e1j )
(e1j )2
2
ei1 )
(ei1 )2
2
e11 )
(e11 )2
2
1j
R
(
i1
R
( i+
11
R
(
1
+
1+
j
e2j )
(e2j )2
2
1
ei2 )
(ei2 )2
2
1
e22 )
(e22 )2
2
2j
i2
22
(e22 )2
and R ( 2 + 2 e22 )
0:
22
2
Rewriting the problem with the binding conditions and taking the …rst order
condition with respect to eij ; we obtain
eij = 1:
The government’s payo¤
FI
is represented as
FI
=S+R
2
2
1
+ :
2
Case 4: Output Monitoring The government’s problem is identical.
It faces with the following ex post incentive compatibility constraints and
individual rationality constraints:
R
(
R
R
1
+
( i+
(
1
+
j
1
1
e1j )
ei1 )
e11 )
(e1j )2
2
(ei1 )2
2
(e11 )2
2
1j
R
(
+
j
e^2j )
i1
R
( i+
1
e^i2 )
11
R
(
1
e^22 )
1
1
+
e^2j
2
(^
ei2 )2
2
(^
e22 )2
2
2j
i2
22
(e22 )2
and R ( 2 + 2 e22 )
0:
22
2
where we have eb2j = e2j
bi2 = ei2
2 + 1 and e
2 + 1.
Since the last incentive compatibility constraint is binding, we have
14
e11 = e12 = e21 = 1
2p
and e22 = 1
(
(1 p)2
FO
Then, the government’s payo¤
FO
3.3.3
=S+R
2
1 ):
2
is represented as
2+
1 p(1 + p2 )
+
(
2
(1 p)2
2
1) :
2
Comparison
By the comparison of the government’s payo¤s, we have
and
p(1 + p2 )
2
( 2
1) > 0
(1 p)2
= 2p( 2
1 ) > 0:
GO
FI
GI
FI
1) 2
p(1 + p2 )
(
(1 p)2
=
Also, we have
GI
GO
= p(
where we satisfy
2
2
1
<
> p(
2
1 ) (2
p) > 0:
(1 p)2
: We conclude that
p2 + 1
FI
4
1)
2
GO
<
FO
=
GI
<
:
Optimal Industry Structure
We have analyzed optimal contracts in a decentralized industry, a consolidated industry with a decentralized organization, and a consolidated industry
with an integrated organization. In either structure, we have
and
FI
<
GO
=
FI
<
GO
=
FI
<
GO
and obtain the following proposition.
15
=
FO
FO
<
<
FO
<
GI
GI
GI
;
Proposition 1 Whether a government is under a decentralized industry with
two …rms or under a consolidated industry with a single …rm, it selects to be
a residual claimant and implements input monitoring.
Next, we compare the government’s payo¤s, when it implements output
monitoring. We obtain
GO
GO
and
Since
GO
=
p (p2
(1
=
FO
p + 1)
p)2
< GO =
p
1
FO
<
(1 p)2
; we must satisfy (
1 + p2
GO
GO
=
and
GO
=
2
1
p
=
p3
(1
p)2
>0
:
2
1) <
2
(1 p)4
: Then, we
(1 + p2 )2
have
p2 (1 + p)
(
(1 p)2
1
2
FO
<
GO
=
2
1)
2
FO
>
p2 (1 + p)(1 p)2
>0
(1 + p2 )2
1
2
:
We conclude
GO
=
FO
<
GO
=
FO
<
GO
=
FO
and obtain the following proposition.
Proposition 2 Under output monitoring, residual claimancy is not an issue. The government prefers a consolidated industry with a decentralized
organization.
When the government implements input monitoring, we obtain
GI
GI
FI
FI
GI
and
Since
2
1
<
FI
1
>0
2
1
= >0
2
< GI =
=
<
(1 p)2
; we also have
1 + p2
16
FI
=
GI
FI
:
FI
and
GI
=
GI
<
1
2
2p(
FI
1)
2
4p3 + 9p2 4p + 1
>0
2 (p2 + 1)
>
:
We have
FI
GI
<
<
FI
=
FI
<
GI
GI
=
;
and following proposition.
Proposition 3 When a government implements input monitoring, it selects
to be a residual claimant under a decentralized industry or under a consolidated industry with a decentralized organization.
We compare the government’s payo¤s, when a residual
2p(1 p)2
(1 p)2
and
0
<
<
government. Since 2
<
1
1 + p2
1 + p2
GO
GI
GI
and
p
1
+
(
2 1 p
1
p
> +
(
2 1 p
< GO :
=
claimant is the
1
; we have
2
2
2
1)
2p(
2
2
1)
2p(1 p)2
>0
1 + p2
1)
2
Hence, when the government is a residual claimant, we have
GO
GI
<
<
GO
<
GO
GI
<
=
GI
;
and following proposition.
Proposition 4 When a government is a residual claimant, it selects input
monitoring under a decentralized industry or under a consolidated industry
with a decentralized organization.
We compare the payo¤s when a residual claimant is the …rm. Since
(1 p)4
p(1 p)2
1
2
( 2
and
0
<
< ; we have
1) <
2
2
2
1+p
2
(1 + p )
FI
FO
=
and
FO
<
p(1 + p2 )
(
(1 p)2
1
2
FI
2
:
17
2
1)
>
1
2
p(1 p)2
>0
(1 + p2 )
Hence, when the …rm is a residual claimant, we have
FI
<
FO
<
FI
=
FI
<
FO
<
FO
and following proposition.
Proposition 5 When a …rm is a residual claimant, a government selects
output monitoring under a consolidated industry with a decentralized organization.
5
Conclusion
Finally, we discuss the privatization and division of state-owned monopolistic
companies such as Japan Highway Public Corporation (JH). Before the privatization and division, the state-owned companies supplied the same quality
of nationwide services. It implies that the government faced with an integrated industry. Since these companies were not allowed to pursue pro…ts,
the government was a residual claimant. In this scenario, as discussed above,
we have
GO
<
GI
<
GO
<
GI
:
The government selects to implement input monitoring and make the …rm
to have a decentralized organization.
After the privatization and division of these state-owned companies, the
multiple private companies supply these services. Also, each private company
pursues pro…t and is a residual claimant. In this case, as discussed above,
we have
FI
<
FO
:
The government selects to implement output monitoring.
In general, output monitoring is less costly and more accurate than input
monitoring. When output monitoring is implemented, as discussed above,
we have
GO
=
FO
<
GO
=
FO
<
GO
=
FO
:
The government selects the integrated industry with the decentralized organization. Under this structure, whichever is a residual claimant, the government obtains the highest payo¤.
It suggests that the same quality of nationwide service is to be supplied by
a monopolistic company with the decentralized organization. The important
18
concept is monopoly in the industry and decentralization in the organization.
Furthermore, since residual claimancy does not matter, a state-owned company and a privatized company yield the identical payo¤. Nationalization
versus privatization is not an issue.
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