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Screening without Commitment

May 2013
Working Paper
12-019
By  Andres Drenik, Ricardo Perez-Truglia
Employees in some government agencies and companies seem to receive salaries much higher than those offered by the private market, and government organizations seem to employ more people than optimal. Some authors have suggested that public employment is used by governments as a tool for income-redistribution. We present a model that provides theoretical support for that conjecture. Due to fairness concerns, when redistributing the government uses work requirements because of its screening capabilities. We then study how the availability of public employment for redistribution affect the equilibrium. We show that when the government lacks commitment power, screening through work requirements aggravates the moral hazard problem associated to redistribution, ultimately leading to a lower equilibrium eeffort and possibly to a Pareto-dominated allocation.