We discuss the relative merits of public and private ownership. Our starting point is the analysis of Hart, Schleifer and Vishny (HSV), who apply an incomplete contract framework to study the difference between private and public ownership. Our analysis departs from HSV’s model in two aspects. First, we allow for cost-sharing contracts between the government and the firm. Second, we assume that the manager of a private firm may incur additional costs in order to produce private benefits, or perks (alternatively, this may reflect cross-subsidization). Managers in publicly owned firms do not have the same opportunity to produce perks, as the government when it owns the firm can monitor the manager’s costs more closely. The cost-sharing contract allows the government to govern the incentives for cost reductions in a privatized firm, and the government can thereby reduce the private firm’s incentives to dump quality in order to save on costs. This comes at a cost, however, as a low-powered incentive contract increases the manager’s incentives to consume perks. We show that if quality dumping is important, public ownership is still preferable to private ownership.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3992.
Find related papers by JEL classification: L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Holmstrom, Bengt R. & Tirole, Jean, 1989.
"The theory of the firm,"
Handbook of Industrial Organization,
in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133
Elsevier.
[Downloadable!] (restricted)