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Ownership Versus Environment: Why are Public Sector Firms Inefficient?

  • Ann P. Bartel and Ann E. Harrison
  • Ann P. Bartel and Ann E. Harrison

In this paper, we disentangle the sources of public sector inefficiency using 1981-1995 panel data on manufacturing firms in Indonesia. We consider two leading hypotheses: (1) public sector enterprises are inefficient due to agency-type problems or (2) public sector enterprises are inefficient because of the environment in which they operate, as measured by the soft budget constraint or barriers to competition. The two models are nested in a production function framework. The empirical results provide support for both models. Public sector enterprises shielded from import competition or with access to soft loans are significantly less efficient than their private sector counterparts. In addition, changes in ownership have large, independent effects on efficiency: in 1993, a full privatization is estimated to increase plant-level total factor productivity by 23 percentage points. Even without privatization, however, eliminating soft loans could raise total factor productivity by 8 to 9 percentage points.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 257.

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Length: pages
Date of creation: 01 Jun 1999
Date of revision:
Handle: RePEc:wdi:papers:1999-257
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  16. Narjess Boubakri & Jean-Claude Cosset, 1998. "The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries," Journal of Finance, American Finance Association, vol. 53(3), pages 1081-1110, 06.
  17. Ehrlich, Isaac & Georges Gallais-Hamonno & Zhiqiang Liu & Randall Lutter, 1994. "Productivity Growth and Firm Ownership: An Analytical and Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 1006-38, October.
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