The Proper Scope of Governments When Costs are Contractible
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.
If you experience problems downloading a file, check if you have the proper application to view it first. 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.
|Date of creation:||Jul 2003|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Andrei Shleifer, 1998.
"State versus Private Ownership,"
Journal of Economic Perspectives,
American Economic Association, vol. 12(4), pages 133-150, Fall.
- Andrei Shleifer, 1998. "State Versus Private Ownership," Harvard Institute of Economic Research Working Papers 1841, Harvard - Institute of Economic Research.
- Andrei Shleifer, 1998. "State Versus Private Ownership," NBER Working Papers 6665, National Bureau of Economic Research, Inc.
- Anke S. Kessler & Christoph Lülfesmann, 2001. "Monitoring and Productive Efficiency in Public and Private Firms," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(2), pages 167-, February.
- Jean-Jacques Laffont & Jean Tirole, 1991.
"Privatization and Incentives,"
572, Massachusetts Institute of Technology (MIT), Department of Economics.
- David E. M. Sappington & Joseph E. Stiglitz, 1987.
"Privatization, information and incentives,"
Journal of Policy Analysis and Management,
John Wiley & Sons, Ltd., vol. 6(4), pages 567-585.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Schmidt,Klaus M., 1991.
"The costs and benefits of privatization,"
Discussion Paper Serie A
330, University of Bonn, Germany.
- Oliver Hart, 2002.
"Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships,"
The Centre for Market and Public Organisation
02/061, Department of Economics, University of Bristol, UK.
- Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages C69-C76, March.
- Besley, Timothy J. & Ghatak, Maitreesh, 2001.
"Government versus Private Ownership of Public Goods,"
CEPR Discussion Papers
2725, C.E.P.R. Discussion Papers.
- Timothy Besley & Maitreesh Ghatak, 2001. "Government Versus Private Ownership of Public Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1343-1372.
- Oliver Hart & Andrei Shleifer & Robert Vishny, 1996.
"The Proper Scope of Government: Theory and an Application to Prisons,"
Harvard Institute of Economic Research Working Papers
1778, Harvard - Institute of Economic Research.
- Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
- Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," NBER Working Papers 5744, National Bureau of Economic Research, Inc.
- Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3992. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct email address
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.