(Mis)Allocation effects of an overpaid public sector

• Grant number: 14/06193-8
• Support Opportunities: Scholarships abroad - Research
• Start date: July 06, 2014
• End date: August 06, 2014
• Field of knowledge: Applied Social Sciences - Economics - Growth, Fluctuations and Economic Planning
• Principal Investigator: Marcelo Rodrigues dos Santos
• Grantee: Marcelo Rodrigues dos Santos
• Host Investigator: Tiago Vanderlei de Vasconcelos Cavalcanti
• Host Institution: Instituto de Ensino e Pesquisa (Insper). São Paulo , SP, Brazil
• Institution abroad: University of Cambridge, England

Abstract

In an economy in which the public sector is productive and factor inputs are rewarded according to their marginal productivity in both the public and the private sectors, the presence of a large government does not generate necessarily any allocation problem. When the provision of public infrastructure is below its optimal scale, then an increase in the size of the government can lead to an increase in total factor productivity (TFP). There is, however, a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are completely different for public and private employees. Such differences in earnings and labor legislations between public and private workers have an impact on the occupational decision of agents and might generate some type of misallocation in the economy. We develop an equilibrium model with endogenous occupational choice, heterogeneous agents and imperfect enforcement to study the quantitative implications of an overpaid public sector. (AU)