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Private or Public? A taxonomy of optimal ownership and management regimes

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  • Stephen King
  • Rohan Pitchford

Abstract

We develop a theory that explains the difference between public and private ownership for the case of firms that are well approximated by an owner\managed or closely held form of firm. The theory is based on government monitoring and control of actions that potentially allow managers to divert value to themselves. More ‘public’ firms are synonymous with greater control of such actions, but generate greater bureaucracy costs. Therefore managers of public firms face flatter commercial incentives than managers of private firms. Flat incentives can be socially desirable when commercially productive activities generate large social harms relative to profit, but are undesirable when these activities are either benign or create external social benefits. The model we develop is flexible and has wide practical application. We provide a mapping between the qualitative characteristics of an asset, its main use – including public goods characteristics, and spillovers to other assets values – and the optimal ownership and management regime. The model is applied to single and multiple related assets. We address questions such as; when is it optimal to have one of a pair of related assets public and the other private; when is joint management desirable; and when should a public asset be managed by the owner of a related private asset? We show that while private ownership can be judged optimal in some cases solely on the basis of qualitative information, the optimality of any other ownership and management regimes relies on quantitative analysis. Application to emergency services, toxic waste disposal, retail product innovation, and vertical production chains (such as airports and water provision) are discussed.

Suggested Citation

  • Stephen King & Rohan Pitchford, 2001. "Private or Public? A taxonomy of optimal ownership and management regimes," International and Development Economics Working Papers idec01-5, International and Development Economics.
  • Handle: RePEc:idc:wpaper:idec01-5
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    File URL: https://crawford.anu.edu.au/degrees/idec/working_papers/IDEC01-5.pdf
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    References listed on IDEAS

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    Cited by:

    1. Pitchford, R. & King, S., 1998. "Private or Public? A Taxonomy of Optimal Ownership and Management Regimes," Papers 343, Australian National University - Department of Economics.
    2. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    3. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    4. Bennett, John & Iossa, Elisabetta, 2006. "Building and managing facilities for public services," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2143-2160, November.
    5. Cook, David C. & Lonsdale, Mark, 2006. "A strategic protection approach to biosecurity: Policy implications of an ‘immune system’ model for addressing the risks and consequences of invasive species," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 174469, Australian Agricultural and Resource Economics Society.
    6. de Bettignies, Jean-Etienne & Ross, Thomas W., 2009. "Public-private partnerships and the privatization of financing: An incomplete contracts approach," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 358-368, May.
    7. Jean-Etienne de Bettignies & Thomas W. Ross, 2004. "The Economics of Public-Private Partnerships," Canadian Public Policy, University of Toronto Press, vol. 30(2), pages 135-154, June.
    8. Cook, David C. & Fraser, Rob W. & Weinert, Andrew S., 2013. "Eradication vs. Control in Biosecurity Policy-Making: Mediterranean Fruit Fly in Western Australia," 87th Annual Conference, April 8-10, 2013, Warwick University, Coventry, UK 158701, Agricultural Economics Society.
    9. 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 69-76, March.
    10. Cook, David C. & Fraser, Rob W. & Weinert, Andrew S., 2013. "An Example of How Chemical Regulation is Affecting Biosecurity Policy-Making: Mediterranean Fruit Fly in Western Australia," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia 152142, Australian Agricultural and Resource Economics Society.
    11. Lassila, Jukka & Lazutka, Romas & Morkuniene, Audrone & Jensen, Svend E. Hougaard, 2002. "Lithuanian Pension System: Alternatives and Proposals for the Future - A Summary Report by The Phare Study Group," Discussion Papers 713, The Research Institute of the Finnish Economy.
    12. repec:ags:aare05:139327 is not listed on IDEAS

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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