Optimal pricing and grant policies for museums

Resumen

Considering two potential sources of income (public grants and ticket reve-nues), we have defiined a theoretical model where the public agency is the prin-cipal and the manager of the museum is the agent. This model allows us to design the optimal contract between both sides and thus to establish the opti-mal values of grants, ticket prices, budget and effort applied by the manager. Furthermore, we have found a theoretical reason to explain the inelastic pricing strategy that has been found in some of the empirical research on cultural and sports economics. The main conclusion is that the optimal contract allows a Pareto optimum solution in prices that does not change if we introduce moral hazard into this relationship. This solution allows us to conclude that the public agency should regulate ticket prices in accordance with the social valuation. However, public grants and museum budgets would be affected by the existence of this problem, moving the equilibrium away from the Pareto optimum situation. In this case, even with a risk averse manager and a risk neutral public agency, grants and budgets will depend on results because higher budgets related to good results provide the main incentives to increase the managers level of effort. Although the focus of this paper is on museum administration, the model that we have developed can be easily generalized and applied to other institutions, such as schools, sport facilities or NGOs, which are able to raise funds directly from private (e. g. ticket revenues or membership fees) or public sources (e.g. public grants).