Coexistence of public and private job agencies: Screening with heterogeneous institutions

In response to the analysis of bureaucracies and the finding of inherent in efficiencies, public choice theory argues for an increase in competition by contracting out government services and deregulation. The paper explores t he effect of coexisting public and private employment services in a model w ith private information of the worker about her ability and unobservable ef fort choice. The employer's use of an efficient unemployment exchange and a n efficient private agency may lead to optimal screening with first best co ntracts. This is due to the assumption that good types of workers lose more human capital than bad types in periods of unemployment or mismatch. In co ntrast to standard screening contracts, a bad type of worker earns an infor mation rent if the employment exchange is inefficient, but the employer cho oses not to use the private agency for good types.