Public Ownership as a Signalling Device
We study public ownership from the perspective of political economics. A partly partisan government runs a state-owned firm. The number of employees the government wants to hire depends both on economic conditions and on the preferences of the government, both unknown to the electorate. The government's policy towards the state-owned firm gives a signal of its preferences, and may thereby influence the probability that the government is re-elected. As a result, the governance of the firm becomes inefficient and static, in the sense that it does not react adequately to changing economic conditions.
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