Privatization, Information and Incentives

Abstract

In this paper, the choice between public and private provision of goods and services is considered. In practice, both modes of operation involve significant delegation of authority, and thus appear quite similar in some respects. The argument here is that the main difference between the two modes concerns the transactions costs faced by the government when attempting to intervene in the delegated production activities. Such intervention is generally less costly under public ownership than under private ownership. The greater ease of intervention under public ownership can have its advantages; but the tact that a promise not to intervene is more credible under private production can also have beneficial incentive effects, The Fundamental Privatization Theorem (analogous to The Fundamental Theorem of Welfare Economics) is presented, providing conditions under which government production cannot improve upon private production. The restrictiveness of these conditions is evaluated.

Incentive regulation and investment: evidence from European energy utilities

“…Martimort (2006) shows that contract incompleteness and, more specifically, limitations to regulatory commitment and state control, may affect the decision to privatize the utility as well as its ex post performance. On the one hand, the promise not to intervene ex post is more credible under private production than under state ownership, and private firms are thus expected to invest more, because regulatory commitment is (supposed to be) more pronounced (Sappington and Stiglitz 1987). 6 On the other hand, private ownership may provide managers with stronger incentives to invest in cost reducing activities that secure larger benefits and higher (implicit or explicit) rewards.…”

The Impact of Privatization and Competition in the Telecommunications Sector around the World

“…But it is likely that private firms will face less government intervention than public ones. Sappington and Stiglitz (1987) argue that privatization increases the transaction costs of government intervention in firm decision-making. While privatization does not imply that politicians will not increase employment beyond the profit-maximizing level or subsidize loss-making firms, excessive employment and subsidization are clearly easier under public ownership.…”

Business groups and their types

“…In state-owned business groups, the driver for unrelated diversification is the solution of market imperfections that have social benefit, that is, activities that are important for the country but that private investors are not willing to develop, such as the provision of subsidized public goods or the development of a region (Sappington & Stiglitz, 1987;Willner, 1996). Additionally, in some cases state-owned conglomerates are forced into new activities that have high political value, such as ensure that a given product continues to be available to the public, or to avoid the unemployment that follows the bankruptcy of a private firm (Vickers & Yarrow, 1988).…”