Firm Ownership and Economic Efficiency

The objective in this paper is to improve the existing evidence regarding the role ownership plays in economic efficiency. It is pursued through enhancements in modeling, estimation techniques, and experimental design. With respect to modeling, state ownership is explicitly introduced into the simple model of the financially constrained firm in order to trace its implications. In turn, the interrelated, three-equation input demand model that emerges is estimated with consistent panel data techniques, using information gathered from state and private firms that operated in large-scale Greek manufacturing during the 1979-1988 period. The results show that, per unit of output, the amounts of labor, capital, and credits employed by state firms were 15.7, 12.2, and 49.1 percent larger than those employed by private firms in the same industries. Moreover, taking input prices into consideration, these findings indicated that state firms incurred 46.2 percent higher costs per unit of output and that liable for their relative inefficiency were technical, allocative and ownership reasons by contributing respectively 16.3, 25.5 and 4.4 percentage points. Last, but not least, state ownership was found to alter significantly the conventional patterns in which the employment of inputs responds to equity and input price changes. Thus, in contrast to claims made by some researchers, state ownership may influence economic efficiency as well as exercise several other important effects.