Moral Hazard, Transaction Costs and the Reform of Public Service Employment Relations

This article analyses the reform of public service employment relations inspired by the New Public Management (NPM) approach, which has challenged both the traditional 'sovereign employer' and 'model employer' approaches to public service employment regulation. It envisages a double process of convergence: between public and private sector employment relations within each country, and in public service employment relations between different countries. However, the outcomes are mixed, and unexpected or perverse effects have often followed the reform attempts. These stem from a neglect of the distinctiveness of the public sector employer as a political institution and an excessive attention to moral hazard and agency costs. What is needed is a richer variety of mechanisms, more sophisticated and less unilateral than those borrowed from agency theory.