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The Costs and Benefits of Privatization: An Incomplete Contracts Approach
Abstract
This article develops a model of privatization using an incomplete contracts approach. We argue that different allocations of ownership rights lead to different allocations of inside information about the firm, which in turn affect both allocative and productive efficiency. Privatization is seen as a commitment device of the government to credibly threaten to cut back subsidies if costs are high in order to give managers better cost-saving incentives (a "harder budget constraint"). The cost of privatization is that allocative efficiency is distorted. Copyright 1996 by Oxford University Press.
... This area is called 'gross consumer surplus' by Varian (2014: 256). Schmidt (1996a) is variant of Schmidt (1996b). Schmidt (1996b) considers the case of privatisation to an employee manager while Schmidt (1996a) applies to the case of privatisation to an owner-manager. ...
... Schmidt (1996a) is variant of Schmidt (1996b). Schmidt (1996b) considers the case of privatisation to an employee manager while Schmidt (1996a) applies to the case of privatisation to an owner-manager. While this second case is less realistic it is simpler and does not require the assumption that the manager is an empire builder that is utilised in Schmidt (1996b). ...
... Schmidt (1996b) considers the case of privatisation to an employee manager while Schmidt (1996a) applies to the case of privatisation to an owner-manager. While this second case is less realistic it is simpler and does not require the assumption that the manager is an empire builder that is utilised in Schmidt (1996b). 92 Technically the multi-principal distortion is similar to the double marginalisation on two complementary goods sold by noncooperative monopolists. ...
The major additions to the revised edition include new sections or subsections on X-inefficiency, the division of labour and the firm -- both pre and post-1970, not-for-profit firms, cooperatives, mutuals, an outline of Arnold Plant's paper, "Centralize or Decentralize?"', a discussion of the contemporary literature on the human-capital based firm, an outline of a general theory of ownership of the firm, a discussion of the Hart (1995) model of the property rights approach to the firm and a discussion of Silver (1984) which has been added to the entrepreneur and the firm section. A small addition to the material on the Sreni along with new material on the commenda, waqf and clan corporation has been added to section 2.1. Foss's argument that one reason for the firm being ignored for so long is that the purpose of economic theory is to explain market-level phenomena is added to chapter 2. In chapter 3 a discussion of Hodgson's attack on Coase's analysis of the employment relationship has been included. In addition there are a number of more minor additions to the material in a number of sections. Some material has also been rewritten in the hope of improving the exposition. A number of errors have also been corrected and the references have been updated.
... This area is called 'gross consumer surplus' by Varian (2014: 256). 86 Schmidt (1996a) is variant of Schmidt (1996b). Schmidt (1996b) considers the case of privatisation to an employee manager while Schmidt (1996a) applies to the case of privatisation to an owner-manager. ...
... 86 Schmidt (1996a) is variant of Schmidt (1996b). Schmidt (1996b) considers the case of privatisation to an employee manager while Schmidt (1996a) applies to the case of privatisation to an owner-manager. While this second case is less realistic it is simpler and does not require the assumption that the manager is an empire builder that is utilised in Schmidt (1996b). ...
... Schmidt (1996b) considers the case of privatisation to an employee manager while Schmidt (1996a) applies to the case of privatisation to an owner-manager. While this second case is less realistic it is simpler and does not require the assumption that the manager is an empire builder that is utilised in Schmidt (1996b). 87 Technically the multi-principal distortion is similar to the double marginalisation on two complementary goods sold by noncooperative monopolists. ...
This is a revised edition of Walker (2017). New sections or subsections have been added on the X-inefficiency model, the division of labour and the firm - both pre and post-1970, ownership of the firm and the human capital based firm. Additions have been made to sections on entrepreneurship, the incomplete contracts approach to the firm, the discussion of Coase’s paper on the ‘The Nature of the Firm’, the discussion of industry-level analysis versus intra-firm analysis, reasons for ignoring firm, a small addition has been made to the Sreni material in section 2.1 and material on Commenda, Waqf and the Clan Corporation has also been added to section 2.1. Appendix 4 has been deleted.
Walker, Paul (2017). The Theory of the Firm: An overview of the economic mainstream, London: Routledge.
... More recent studies are Schmidt (1996), Hart et al. (1997), and Williamson (1999). Schmidt (1996 argues that under private ownership the government does not observe production costs and can therefore credibly commit not to subsidize the firm. ...
... More recent studies are Schmidt (1996), Hart et al. (1997), and Williamson (1999). Schmidt (1996 argues that under private ownership the government does not observe production costs and can therefore credibly commit not to subsidize the firm. This lack of subsidy may cause inefficient bankruptcies ex post but has the benefit of incentivizing the firm's manager to invest in cost reduction ex ante. Hart et al. (1997) and Williamson ( ...
... The second difference between the private and state firm is informational (e.g., Schmidt, 1996). Under state ownership, buys the input and receives the output so she observes . ...
We study how weak constraints on the government affect private contracts and the ownership of firms. To discourage expropriation, a social contract must give the government a stake in firm output. However, this reduces the firm owners’ incentives to honor business contracts with suppliers, undermining their credibility. This tension disappears if suppliers contract directly with the government, which we interpret as a state-owned firm. Our model therefore predicts that under weak political institutions, contracting with the government may be second-best efficient if private business contracts are not verifiable, and hence require self-enforcement. We discuss evidence on privatizations in developing countries, and on the emergence of private firms in East Asia, which is consistent with our model’s predictions. Our model has broader implications for contracting in the shadow of power, including the effect of corporate governance on the design of intra-firm hierarchies.
... De manera similar, Schmidt (1996) plantea que un gobierno benevolente tenderá igualmente a subvencionar en exceso a las empresas estatales SOEs en relación con las empresas privadas (ver también Kornai, 1992). Schmidt (1996) señala que, si el gobierno elige un nivel de producción que coincida con el costo social y el beneficio social, entonces el administrador de la empresa pública no tendrá ningún incentivo para reducir sus costos de producción y, por lo tanto, requerirá siempre mayores subsidios en el tiempo (Kornai, 1980;Djankov, 1999). ...
... De manera similar, Schmidt (1996) plantea que un gobierno benevolente tenderá igualmente a subvencionar en exceso a las empresas estatales SOEs en relación con las empresas privadas (ver también Kornai, 1992). Schmidt (1996) señala que, si el gobierno elige un nivel de producción que coincida con el costo social y el beneficio social, entonces el administrador de la empresa pública no tendrá ningún incentivo para reducir sus costos de producción y, por lo tanto, requerirá siempre mayores subsidios en el tiempo (Kornai, 1980;Djankov, 1999). La privatización, asevera el autor, es una forma de compromiso creíble, a través de la cual un gobierno benevolente se compromete y se niega a sí mismo el acceso a la información privada sobre los costos de producción de la empresa. ...
Resumen: En este ensayo se examina el debate económico acerca de las empresas privadas (POEs por sus siglas en inglés) y las empresas públicas (SOEs por sus siglas en inglés). A nivel internacional han resurgido ideas respecto al "Estado empresario" y a nivel nacional han surgido nuevas voces que promueven un rol más activo del Estado dentro de la producción económica. Ante estas ideas de reintroducir al Estado dentro de la economía y del desarrollo industrial, resulta pertinente revisar qué nos dicen la evidencia empírica y la teoría económica acerca del rol del Estado en la economía y su posible eficiencia. Para ello, en este trabajo se estudia de forma amplia tanto la teoría como la evidencia económica en cuanto a la eficiencia de las empresas públicas versus las empresas privadas. El artículo primero proporciona un marco conceptual, basado en la teoría económica, para comprender ese debate. Segundo, se revisa la evidencia empírica a nivel mundial para entender qué nos revela la historia y la evidencia acumulada en los últimos cuarenta años en torno al debate POEs versus SOEs. El ensayo concluye con ciertas reflexiones y planteando dudas sobre el posible nuevo rol del Estado dentro del desarrollo en Chile. Palabras Clave: Empresas estatales; empresas públicas; privatización; Estado emprendedor; eficiencia económica. Abstract: This essay examines the economic debate around Privately Owned Enterprises (POEs) and State-Owned
... Laffont and Tirole (1991) extended their previous model with incomplete information to compare public and private firms in the framework of incomplete contracts. Schmidt (1996), concerned with the soft budget constraint, compared SOEs with managers weakly motivated by reducing costs and regulated private firms with asymmetry of information. ...
... If the output price p(C, W ) wins, we just have to add to the expressions of the utilities given in Equations from (23) to (27) the share of each individual in the losses, equal to (1 − ν) π αθ . Recall that the expression of π is given by Equations 17 and 18. ...
We consider a general equilibrium model with vertical preferences, where workers and consumers are differentiated respectively by their sensitivity to effort and their intensity of preference for quality. We consider a public monopoly, i.e. which is owned equally by all individuals. The question is under which conditions the firm will be privatized and at which rate/price. The decisions are taken through majority vote in a plurality system. When the firm is controlled by the State, the price is determined through a vote among all the population. Otherwise, the price is the one which maximizes the profit. We prove that, when the maximum disutility of working in the firm is higher than the maximum utility of consuming its output, privatization may emerge as a possible choice of the majority, even if no hypothesis is made on the efficiency of a private management relative to a public one.
... Our main findings are that allocative efficiency is higher in private firms, while productive efficiency decreases when government intervention becomes more likely. 4 The theoretical framework follows Schmidt and Schnitzer (1993) and Schmidt (1996aSchmidt ( , 1996b, but our result on allocative efficiency differs substantially. In these three papers, allocative efficiency is larger in public firms, as private owners only consider profitability. ...
... This result contrasts with the existing literature. In Schmidt and Schnitzer (1993) and Schmidt (1996a), for example, allocative efficiency is higher in public firms, since socially costly liquidations are avoided. In these papers, however, it is assumed that public firms cannot be liquidated or that the government cannot avoid the liquidation of private firms. ...
We develop a theoretical model in which there are public and private firms and a government. When firms become insolvent, the government can intervene with bailouts or nationalizations. The government only intervenes when the bankruptcy of a firm entails social costs. In this setting, we analyze how government interventions affect allocative and productive efficiency. Nationalizations of private firms after unprofitable investments lead to increased allocative efficiency despite private ownership. The effort level chosen by the managers and employees working for a firm is also affected by the possibility of government interventions, reducing the productive efficiency advantage of private firms.
... Assuming that both public and private owners' objective is profit maximization, private owners might be better able to solve the principal-agent problem where ownership and control are separate. 6 Private owners might find it easier than public owners to align their objectives with managers' objectives, because public ownership is very diffuse (Shleifer, 1998) or because public owners are unable to apply hard budget constraints (Schmidt, 1996). Another strand of the theoretical literature assumes that public and private owners have different objectives for the firm. ...
... Incentives based arguments for why privatization increases productivity are often similar to arguments for why competition increases productivity, which gives rise to a debate about whether privatization itself increases productivity (as in Schmidt, 1996) or whether the effect of privatization is conditional on environmental factors, in particular competition. In principalagent settings the threat of bankruptcy (Schmidt, 1997), better information (Hart, 1983), or increased sensitivity of profits to managerial effort (Willig, 1987) can explain why competition increases productivity. ...
Does privatization increase plant productivity because the private owner's objective is different, or because they are better able to control management? And, is privatization sufficient to improve productivity, or is it only effective in combination with competition? We answer these questions using the quasi-experiment of Great Britain's electricity industry privatization. To separate the effect of a change in objectives from a change in incentives we assume, that the former only affects labor but not fuel productivity. And, assuming that effective competition was only introduced after privatization, we are able to separately identify the effects of privatization and competition. We find that privatization increased labor but not fuel productivity: evidence for the importance of objectives. There is no evidence that the introduction of effective competition after privatization increased labor or fuel productivity: evidence that privatization increases productivity by itself.
... The potential for innovation may be even lower under state bureaucracy. State bureaucracies are generally associated with weak incentives resulting from the soft budget constraint faced by government bureaucrats (Schmidt, 1996), the challenges to appropriating the value from innovation in a public bureaucracy (Hart, 2003), and the lack of effective competition (Tirole, 1994;Williamson, 1999). Moreover, the state may be subject to competing ideological pressures (Arrow, 1951;Becker, 1985), which will further blunt incentives and cause public bureaucrats to prioritize uncertainty avoidance over innovation (Klein et al., 2013). ...
... On one hand, they suggest that the range of activities for which direct provision by the state is the comparatively efficient solution is fairly limited, consisting only of situations where both ex post information asymmetry and commercial co-specialization are low, and stability over time is to be privileged over innovation (Shleifer, 1998). As such, our analysis embraces the notion of government failure (Coase, 1964;Maskin and Tirole, 2007), highlighting, in particular, the comparative ineffectiveness of public bureaucracy in both driving efficiency and innovation (Schmidt, 1996) and representing the interests of local communities (Ostrom, 1990). On the other hand, we also highlight the critical role of the state in funding or otherwise supporting activities with widespread externalities (Olson, 1965;, including scientific and technological research (Mazzucato, 2015). ...
Research Summary
We develop a theoretical framework to define the comparatively efficient organizational form for dealing with a social issue, based on the market frictions associated with it. Specifically, we argue that for‐profits have an advantage in undertaking innovation and coordinating production economies, non‐profits in playing a fiduciary role given ex post information asymmetry, self‐governing collectives in dealing with bounded externalities through private ordering, and state bureaucracies in governing general externalities. We build on these arguments to develop a mapping between combinations of these market frictions and the comparatively efficient arrangements to govern them, including a variety of hybrid arrangements such as private‐public partnerships, social enterprises, corporate social responsibility, etc. Our framework thus contributes to research in strategy, organizations, and public policy.
Managerial Summary
What is the best way to deal with a social problem? While some believe such problems are best left to the state, others argue that business should take the lead in solving them, or favor non‐profit solutions. In this paper, we move beyond such one‐size‐fits‐all approaches, highlighting the different strengths of different organizational forms. We argue that for‐profits’ strong incentives make them more innovative; non‐profits are more trustworthy in representing the best interests of others; collectives enable actors to self‐organize around a common interest; and the state is best for issues that impact the entire population. We thus develop a mapping between the nature of the social problem and the organizational form—or combination of organizational forms—that may deal with it most efficiently.
... 4 A prominent contribution is Laffont and Meleu (1999). The authors provide a 1 In 2015, over 1.1 billion people worldwide still had no access to electricity, about 663 million lacked access to clean water, 2.4 billion did not have adequate sanitation, and 2.3 billion were not served by an all-weather road (Badré, 2015). 2 For theoretical discussions of the costs and benefits of privatization, see Martimort (2006), Shibata andNishihara (2011), andSchmidt (1996), among others. 3 The literature has examined the impact of, among other factors, institutional quality on these reforms' performance (Belaid et al., 2009Wallsten, 2001). ...
Using data on telecommunications from 1985 to 2022 in 103 countries, this article provides evidence of a robust nonlinear relationship between privatization and corruption showing that the latter has an inverted U-shape effect on the former. Using the Bayesian Corruption Index as a proxy for corruption, we find that the threshold beyond which higher levels of corruption do no longer foster privatization is slightly above 50% of the maximum value of this index. The complexity of the relationship between privatization and corruption points to the need to develop sophisticated strategies to effectively combat corruption, the negative effects of which on social welfare have been widely discussed in the literature.
... For this reason, and in the absence of technical growth as found, the effort-induced actions to adopt are those that cause downward cost shifts such as contracting. But even here, management must do so with caution, because contrary to Reich and Davis (2011) and Godavarthy et al. (2014), only full-service contracting reduces cost. In fact, partial contracting, as found, is positively related to higher labour compensation, showing that it distorts relative input prices and input adjustments towards long run cost minimization levels (Sakano and Obeng 2020). ...
This paper deals with incentivizing public transit systems to exert effort to improve their performance to meet a programmatic goal of a funding agency. It shows the relationship between organisational and employee effort, formulates a net benefit equation with and without user cost savings and derives equations for effort. From these equations it surmises that (a) the larger the incentive the larger the effort transit systems and employees will exert to improve organisational performance, (b) effort is large when user costs are considered and (c) the larger the wage rate the smaller is the effort. In addition, it specifies a labour compensation equation that includes effort and labour intensity as some of its arguments and estimates it with a derived cost function and share equations as a system. The coefficients from them are used to show that when employees are incentivized to exert additional effort to improve organisational performance it increases the incentives, revenue and user cost savings by large proportions and cost by a very small proportion.
... Laffont and Tirole (1993), Schmidt (1996), and Schmidt and Schnitzer (1993) perceive privatization as a commitment mechanism in a financial efficiency problem. One may argue that the commercialization of hospitals -transforming their legal form to municipal, commercial law companies -is a clear and universal form of doing business that allows for the preservation of public ownership of entities. ...
Although the theory of soft budget constraints is widely presented in the literature, little is known about the factors of soft budget constraints in public hospitals in Poland. This study is relevant because many Polish hospitals struggle with serious debt problems. The study aims to systematise the regulatory and legal provision of soft budget restrictions in the activities of healthcare institutions, particularly public hospitals in Poland, and to assess the impact of these restrictions on their further functioning. An analysis of hospitals’ regulatory and legal activities shows the implementation of various soft budget restrictions. On November 20, 2019, Poland returned to the soft budget constraints, which functioned immediately after the introduction of reforms in the late 90s of the last century. As of 2021, out-of-pocket costs for treatment have decreased to 19.56%, but costs are gradually increasing and in 2020, according to the World Bank, they amounted to 71.89%. The provision of medical services mainly by public hospitals owned by local governments and scattered healthcare debt make it difficult to liquidate an inefficient public hospital in the event of its default. The study proves that the main reason for not eliminating the soft budgetary constraints of hospitals through their commercialization was the inconsistency of the carried out reform of commercialization of hospitals with the financial condition of local authorities.
... When the government disburses education funds without having complete information regarding the activities of the university (in the case of PTN-BH), control over cost management will be lost thereby reducing cost efficiency. Complete control and information (in the case of BLU and SATKER) will make expenditure allocations more efficient, and the level of the output will be increased (Schmidt, 1996). Moral hazard problems with the expenditure in certain cases will reduce the efficiency value in the absence of government involvement (Laffont & Tirole, 1991). ...
Arum Prastiwi Universitas Brawijaya This study aims to analyze cost efficiency's performance when producing university outputs from 45 public universities in Indonesia. A stochastic cost frontier multiproduct with six key performance indicators and annual public spending was used as the output and input for the analysis. This study finds that cost efficiency's score is high, compared to one in a previous study. Higher education using the Public Service Agency management pattern has the highest efficiency score compared to establishments with Work Unit and Legal Entity management patterns. This study has several implications; first, the need for effective management patterns; second, the re-evaluation of the privatization policy; and third, improvement in education's output or input.
... The government is unlikely to let SOEs go bankrupt and tends to bail them out in times of financial distress. Therefore, SOE managers feel less pressure to uphold effective performance and are likely to seek personal benefits from SOEs (Laffont and Tirole 1991;Megginson and Netter 2001;Schmidt 1996;Sheshinski and López-Calva 2003). ...
Privatization has played an important role in national economic reform in Vietnam. However, unlike other transitional countries in Central and Eastern Europe, Vietnam has chosen a partial and gradual privatization where the government still holds significant ownership in most privatized firms. Whether partial privatization can enhance privatized firms’ performance or full privatization should have been implemented is a critical question that needs to be answered. This paper utilizes semiparametric regressions to study the relationship between residual state ownership and firm performance. The results indicate an inverted U relationship between state ownership and firm performance. We show that the performance of privatized firms improves with an increase in the level of state ownership until around 40%, after which the effect of state ownership on firm performance tends to decline. This demonstrates that in a transitional context, relinquishing governmental control via privatization can significantly benefit privatized firm performance. However, further reduction of state ownership may decrease the performance of privatized firms. Overall, the study contributes significantly to the growing body of evidence on the nonlinear effects of state ownership. This suggests that in the transitional context of Vietnam, due to weak corporate governance and limited protection of minority shareholders, there could be a temporary optimal position where state and private investors hold balanced ownership to simultaneously supervise operations and promote the performance of privatized firms.
... 3 Addressing the owner's control of the management, the property rights literature argues that public-sector firms suffer from absence of control, since shares are dispersed among the public, whose individuals are not interested in the firm's profits (Alchian and Demsetz 1973;Vining and Boardman 1992). The agency literature around Schmidt (1996) contributes to this by discussing the moral hazard problem between the owners and the management in public-sector firms, as managers can always expect a bailout from the government in times of financial hardship (Kornai 1986) and the government has difficulties in judging the managers' performance due to missing information on the firm's market value (Millward and Parker 1983). Gupta (2005) highlights that studying partial transfers of ownership rights gives the unique opportunity to disentangle these channels. ...
This article investigates the impact of reorganization on productivity within public-sector firms addressing the owners' composition, the board-management relationship, and the management's decision to outsource activities. Considering a large panel of 2,325 German municipally owned utilities between 2003 and 2014, firm-level productivity is estimated based on a control function approach. Contrary to public choice theory, I do not find support for the hypothesis that an increase in government owners' control over the firm, either through shares or the board's control rights, decreases productivity. Looking at reorganization invoked by the management, I find that outsourcing increases productivity, where effects are strongest for service outsourcing.
... on Ownership Structure includesDeYoung and Nolle(1996);Berger,et al.(2000);Bonin,et al(2004);Goldberg,et al(2000);Jeon,et al.(2004);Clarke,et al.(2000);Vennet(1996);Bashir(2000);Micco,et al(2004);Demirgüç-Kunt and Huizinga(1998);Sapienza(2004);;Short(1979);Berglof and Roland(1998);Schmidt(1996);La-Porta,et al.(2002);Bourke(1989);Molyneux and Thornton(1992);Claessens,et al.(1997);Zeitun and Tian(2007);Vernon(1971);Pedersen and Thompson(1997);Leech and Leahy(1991);Berger,Clarke,Cull,Klapper and Udell(2005);Grigorian and Manole(2002) ...
Academic studies of Bangladeshi Private Commercial Banks (PCBs) have identified issues of Corporate Governance relating to ‘crony capitalism’ and political influence. The thesis combines quantitative and qualitative methods. The research employs conventional econometric panel estimation and a novel method of estimating efficiency using a non-parametric bootstrapping technology. The results reveal significant performance differences. To understand the causes underlying the differences in revenue efficiency and profitability, multiple lenses from theories of Corporate Governance are adopted to design semi-structured interviews. Twenty in-depth interviews from a sample of banks, both managers and board members and industry stakeholders are supplemented with documentary analysis.
The quantitative findings reveal a performance gap between 1st Generation PCBs and 2nd and 3rd Generation PCBs in terms of Efficiency and Profitability. 1st Gen PCBs perform worst whereas there is no statistical difference between Gen 2 and Gen 3 PCBs. Moreover, there is no sign of catch-up or improvement for the 1st Generation PCBs. The research demonstrates that an increasing amount of 1st Generation banks’ Non Performing Loans is the main reason for this performance gap.
The interview data relate the performance gaps to inadequate Corporate Governance. The research identifies family-dominated boards that have encouraged crony capitalism and featherbedding of employees resulting in excessive Non Performing Loans and higher overhead costs. Also, these 1st Generation banks are excessively large in terms of employees, rural branches, and remittance earnings leading to a culture of invulnerability to takeover.
... Clarke et al. (2004) state that state-owned enterprises (SOEs) experience poorer corporate governance than private firms; and this could be attributed to weak incentives for managers to perform effectively. SOEs managers do not face a market for their skills or a credible threat of losing their job for non-performance; and bankruptcy, liquidation or hostile takeover are not credible threats for state owned firms (Berglof and Roland, 1998;Dewatripont and Maskin, 1995;Schmidt, 1996;Vickers and Yarrow, 1989;and Vickers and Yarrow, 1991). Micco et al. (2004) attribute state banks' low profitability to the fact that, rather than maximizing profits, they respond to a social mandate. ...
Ownership structure is considered an important factor that affects a firm’s health. If ownership structure affects a firm’s health, it is possible then to use the ownership structure to predict firm profitability. Against this backdrop, this paper analyzes the relationship between ownership structure and bank profitability in Nigeria. There are two motivations for this paper. Firstly, midway into the banks consolidation exercise in Nigeria, the CBN identified the need for a determination of the most appropriate composition of bank capitalization that would enhance the individual and systemic profitability and efficiency of banks in Nigeria post-consolidation. Hence, it decided to minimize state governments’ investment in banks during the exercise and also issued a December 2007 ultimatum to all tiers of governments that have stakes in banks to dilute their investments to a maximum of 10 per cent. Unfortunately, the CBN did not state any econometrically-based rationale giving credence to its directives. Secondly, the effect of ownership structure and concentration on a firm’s performance is an important issue in the literature of finance theory. However, no researcher has studied this important aspect of finance theory in the Nigerian context. It is worth noting that most research on ownership structure and firm performance has been dominated by studies conducted in developed countries. However, there is an increasing awareness that theories originating from developed countries such as the USA and the UK may have limited applicability to emerging markets. Emerging markets have different characteristics such as different political, economic and institutional conditions, which limit the application of developed markets’ empirical models.
... The study extends discussion on the Reform to CSR practices, providing both theoretical and empirical evidence from the world's largest emerging market. Current studies focus on discussing the rationality, mechanisms for achieving, and the influence of mixed ownership (e.g., Schmidt, 1996), or raise concerns about the economic consequences of private enterprises participating in mixed reform (Zhao et al., 2017). However, there is no literature on the CSR performance of private enterprises that participate in the mixed-ownership reform process. ...
China’s historical mixed-ownership reform (the Reform) has prioritized enhancing the efficiency and financial performance of its large state-owned enterprises (SOEs) through introduction of partial private-sector equity ownership. However, the presence of a significant gap between China’s private enterprises’ corporate social responsibility (CSR) practices and those of its SOEs suggests potential for Reform-related ownership changes to negatively impact economy-wide CSR performance. We therefore examine the Reform’s impact on private acquirer firms’ CSR practices. We use a proprietary dataset of firms listed on the Shanghai and Shenzhen Stock Exchanges, covering the 2011–2015 period. Our findings identify that private firms can enhance their economic and political status through acquiring equity in state-controlled or state-owned enterprises (SOEs) and, following this, improve their CSR practices. Our findings have policy implications in the context of the world’s largest emerging market and, more generally, for SOE ownership reform in emerging and transition economies.
... Thus, the impact of privatization on efficiency is ambiguous. Subsequent theoretical work in this area by Schmidt (1996) and Segal (1998) focused on the impact of soft-budget constraints on efficiency in SOEs (via inability of government to credibly commit to closing down unprofitable/high-cost SOEs) or private firms (via government tendency to bail out loss-making firms). Contract incompleteness also affects the cost and quality of services (both being not contractible ex-ante). ...
... Laffont and Tirole (1991) extended their previous model with incomplete information to compare public and private firms in the framework of incomplete contracts. Schmidt (1996), concerned with the soft budget constraint, compared SOEs with managers weakly motivated by reducing costs and regulated private firms with asymmetry of information. ...
We consider a general equilibrium model with vertical preferences, where workers and consumers are differentiated respectively by their sensitivity to effort and their intensity of preference for quality. We consider a public monopoly, i.e. which is owned equally by all individuals. The question is under which conditions the firm will be privatized and at which rate/price. The decisions are taken through majority vote in a plurality system. When the firm is controlled by the State, the price is determined through a vote among all the population. Otherwise, the price is the one which maximizes the profit. We prove that, under some conditions on the dispersion of consumers relative to workers, privatization may emerge as a possible choice of the majority, even if no hypothesis is made on the efficiency of a private management relative to a public one.
... very few examples, Schmidt (1996) and Hart, Shleifer, and Vishny (1997) examine the desirability of privatization and Bentz, Grout, and Halonen (2005), Engel, Fischer, and Galetovic (2013), and Iossa and Martimort (2015) that of publicprivate partnerships used to finance public infrastructure privately and to contract out government services. 3 As just noted, we abstract from efficiency and similar considerations to focus on taxes. ...
Cost of capital and valuation differ in the private and public sectors, because taxes are a cost to the private sector but are only a transfer to the private sector. We show how to transform the after‐tax private sector cost of capital into its pre‐tax equivalent, for comparison with the public sector cost of capital. We establish the existence of a tax induced wedge between these two costs of capital. The wedge introduces a preference on the part of the private sector for assets with rapid tax depreciation, high debt capacity, and low risk. We show that, in circumstances where an asset has identical public and private sector valuation in the absence of taxes, the tax induced difference in valuation is identical to the change in government tax receipts that results from having the asset owned by the private rather than the public sector. We provide some examples of distortions that result from failure to adjust for changes in tax revenues, and show how to effect such adjustment. This article is protected by copyright. All rights reserved
... The ownership or property rights gives the owner complete control and bargaining power and a clearly defined contract helps in the specification of exact terms and conditions (Grossman and Hart 1986;Hart and Moore 1990). The allocation of property rights can determine whether the partnership will operate efficiently (Schmidt 1996;Bester 2009). The effective allocation occurs through the change in structure of commodity from public bad to private bad(s) that ensures responsibility sharing between multi-level agents (Shekdar 2009;Al-Khatib et al. 2010). ...
We envisage the waste management strategy of the local bodies as one of sharing different responsibilities with households along different stages of the process viz., collection, processing and disposal. This difference arises in terms of the variants of Pay-as-You-Throw scheme, recycling arrangements for non-biodegradable waste and treatment options for organic waste. In this article, we account for this policy heterogeneity by locating the waste management practices adopted by different municipal authorities in an integrated strategic framework. We use information on waste management services from country case studies to identify the variations in the sharing arrangements between households and the municipalities in urban areas of low, middle and high-income countries. Our results suggest that an efficient market in waste management might be associated with the degree of apportionment of cost of waste processing by involving households in the primary disposal and private entities in final disposal in the presence of economic instruments.
... Despite their ability to realign the incentives of POEs, these mechanisms are virtually absent in SOEs. Consequently, agency theory contends that privatization can enhance performance by inducing change in corporate governance and altering managerial incentives (Bos, 1991;Cornelli & Li, 1997;Laffont & Tirole, 1993;Sappington & Stiglitz, 1987;Schmidt, 1996;Vickers & Yarrow, 1988). By transforming individuals from managers to entrepreneurs, individuals become the residual claimants of the private enterprise , and residual claimants benefit from positive performance while suffering from bad performance. ...
We explore how institutional quality moderates the effectiveness of privatization on entrepreneurs sales performance. To do this, we blend agency theory and entrepreneurial cognition theory with insights from institutional economics to develop a model of emerging market venture performance. Using data from the World Banks Enterprise Survey of entrepreneurs in China, our results suggest that private-owned enterprises (POEs) outperform state-owned enterprises (SOEs) but only in environments with high-quality market institutions. In environments with low-quality market institutions, SOEs outperform POEs. These findings suggest that the effectiveness of privatization on entrepreneurial performance is context-specific, which reveals more nuance than previously has been attributed.
... May be because the government need to emulate a private owner and leave this strategy for the economic growth. One approach to deal with this mystery has been to use the concept of incomplete contracts (Laffont & Tirole, 1991;Lulfesmann, 2002;Schmidt & Schnitzler, 1993;Schmidt, 1996). When deliberations regarding political power or private incentives are directing political decisions, government bureaucrats deal the likely privatization revenues off against the opportunity to obstruct with the production procedure to their own gain. ...
Governments take privatization stance to reduce its burden in terms of underutilization of resources, over and redundant employment, fiscal burden, financial crises, heavy losses and subsidies in order to improve and strengthen competition, public finances, funding to infrastructure, and quality and quantity of services in terms of management. Study used a comprehensive approach to explore all the reasons of privatization and categorising them based on past literature. Categories formulated are accounting reasons, economic reasons, political reasons, social reasons, motivation from public vs. private ownership differences and incentives of post privatization performance. Moreover the role of government in post privatization arena has prime importance without which the desired objectives can't be achieved. Based on the study it can be inferred that it is not necessary that a country opt privatization based on all the reasons but surely pick one or more from them. Post privatization performance of the previously SOEs is the prime motive behind it. However economic reasons also take part in privatization with same magnitude.
... They show that under different information structures a benevolent policy-maker who can write complete contracts achieves the same welfare outcomes of private owners. This result prompted two research lines: privatisation under incomplete contracts, see Schmidt (1996), where the government is unable to get all the information needed to achieve the Sappington-Stiglitz result; or privatisation where the policy makers have a private agenda, see Shapiro and Willig (1990). On the incomplete contract side the divestiture of public ownership is seen as a mechanism that prevents governments to achieve full information and to 6 For the results showing macroeconomic and individual controls, see the Appendix. ...
In the past two decades privatisation and liberalisation of network industries providing
services of general economic interest (SGEI), have been particularly significant in the
European Union. Wide variations around a common policy trend can, however, be observed across countries and sectors. We focus on electricity and gas sectors because energy sectors have usually been profit makers, not affected by direct government transfers, in contrast to other SGEI. We study the effects of privatisation and other reforms on consumer prices using both subjective data on consumers’ perception of utility prices and data on average prices paid.
... To be more explicit, in general, one would conjecture that when corruption is low and it is difficult to specify a contract between the government and the agents, a GOE will be the preferred solution. This is because it would be too costly to write a contract contingent to all the states of the world and to the expected efforts and outcomes of the agents in each of them (Sappington and Stigliz, 1987;Schmidt, 1996). The opposite situation is when the government is corrupt but a clear contract can be specified. ...
Public enterprises are production units of goods or services under government control. In spite of wide privatizations in the last two decades, public provision in this form can be observed in many countries and sectors, particularly in education, health, transport, energy and environment. This paper uses social Cost Benefit Analysis (CBA) theory to explore the rationale for public enterprises. Three welfare propositions arise from CBA theory in a general equilibrium setting: (1) Under symmetric information and benevolent government, public provision is socially beneficial if: (a) there is a well defined production plan for some goods; (b) optimal policy and socially desirable projects are selected in such a way as to pass a social cost-benefit test at shadow prices; (c) production can never be shut down for some socially desirable goods and optimal procurement is equivalent to public production. (2) Under not (fully) benevolent government, and asymmetric information: (a) sub-optimal policy adoption leads to inconsistency in project selection; (b) the allocation of property rights will also be distorted, as privatization or government ownership are signals fixed by the government; (c) public provision and public procurement will be no more equivalent, because fo differences in information costs. (3) If the social planner is not fully benevolent, but cannot profit from policy design: (a) shadow prices are still sufficient statistics for the evaluating changes of the public plan; (b) public enterprises will be welfare superior to privately-owned enterprises (POEs) when the rents of the planner related to public ownership are less than the rents of the private providers under procurement, and shadow prices must be used to compare the outcomes. The message of the paper points to the overall quality of institutions as a precondition for socially desirable public enterprises as this environment provides policy-makers with the correct incentives to design and implement meaningful policies even when public administrators adopt sub-optimal plans. Hence, the building of a sound quality of institutions should be primarily focused on those mechanisms that select policies. Institutions should constrain self-interested policy-makers from disrupting the welfare signals for policy adoption as well as for project appraisal.
... The rationale underlying incomplete contract theory has also been applied to the question of privatization and PPPs (e.g., Laffont and Tirole 1991;Schmidt 1996;Hart et al. 1997;Hart 2003;see Schönfeld (2011) for a more detailed list with further explanations on the respective models). A general statement on theoretical insights on the allocation of property rights in the context of privatization and PPPs is difficult as the various models include specific scenarios with specific assumptions. ...
Die Flexibilisierung des Infrastruktur- und Ressourceneinsatzes zur Stärkung der Klimaresilienz von Versorgungsinfrastrukturen verspricht zum einen ökonomische Vorteile. Zum anderen wird die Rolle von Verbrauchern neu gedacht und ihre Handlungskapazitäten gesteigert, indem sie für die Probleme des Klimawandels sensibilisiert und bei der Behebung von Versorgungsengpässen eingebunden werden. Digitale Anwendungen, die Blockchain-Technologie und moderne verhaltensökonomische Ansätze wie Nudges sind dabei ein wichtiges Element, um vorliegende Flexibilitätspotenziale zu aktivieren.
... In particular, when contracts are incomplete, ownership matters even with a benevolent government. Tirole (1991, 1993) and Schmidt (1996aSchmidt ( , 1996b show why contractual incompleteness matters in the relationship between the public and private sectors. First, there is an informational asymmetry about the relevant costs and benefits of the project between the (benevolent) policymaker and the delegated manager. ...
This paper extends the discussion of the investment cycle in Ahmad (2017) (G24 paper), in which the questions concerning "what" to invest in and "where" are addressed. This paper examines the "how" of investment for sustainable development, focusing on options for contracting arrangements, such as PPPs, that would help to involve the private sector, manage risks in the presence of asymmetric information, as well as uncertainty about climate change. It also addresses the strengthening of national and local institutions and the possible role of international financial institutions. In discussing the investment options, the paper also updates a G24 review of the empirical and theoretical literature on involving the private sector involvement in public investments (Ahmad et al., 2018).
In diesem Arbeitspapier wird die Aussagekraft von quantitativ-empirischen Studien zu Effizienzunterschieden zwischen privaten und öffentlichen Stromverteilnetzbetreibern untersucht, um damit unter anderem aufzuzeigen, inwiefern derartige Analysen einen wertvollen Beitrag zu dieser politisch und gesellschaftlich bedeutsamen sowie viel diskutierten Thematik leisten können. Dazu werden zunächst anhand einer theoriegeleiteten Analyse auf Basis der Neuen Institutionenökonomik wesentliche Aspekte und Herausforderungen identifiziert, die es bei Effizienzvergleichen zwischen privaten und öffentlichen Unternehmen zu berücksichtigen gilt. Anschließend werden sieben Studien, in denen die Effizienz privater und öffentlicher Stromverteilnetzbetreiber mittels statistischer Methoden analysiert wird, dahingehend ausgewertet, ob und wie mit den identifizierten Herausforderungen umgegangen wird. Es zeigt sich, dass zwar in einigen der Studien einzelne der aus (institutionen-)ökonomischer Perspektive wesentlichen Aspekte explizit in den Mittelpunkt der Analysen gestellt werden, jedoch in keiner der betrachteten Publikationen die in diesem Artikel dargelegten Herausforderungen vollumfänglich beachtet und auf adäquate Weise berücksichtigt werden. Dies schränkt die Aussagekraft der Studien ein. Die Ausführungen in diesem Arbeitspapier können als Anknüpfungspunkt für methodische Weiterentwicklungen im Bereich der empirischen Effizienzforschung dienen. Darüber hinaus wird kurz darauf eingegangen, wie ein sinnvolles Zusammenspiel zwischen theoriegeleiteten und quantitativ-empirischen Analysen potentiell dazu beitragen kann, aussagekräftigere und damit wertvollere Untersuchungsergebnisse für die Ableitung wissenschaftlich fundierter Handlungs-empfehlungen zu der betrachteten Thematik zu generieren.
I compare two different systems of provision of binary public goods: a centralized system, operated by a benevolent government that has limited commitment power; and a decentralized system, based on voluntary contributions, where agents can communicate but cannot write contracts. I show that any ex‐post individually rational allocation that is implementable by the centralized system is also implementable by the decentralized system. This suggests that when the public good provision problem is merely an informational one, as is the case with binary public goods, a decentralized system may perform better.
This paper identifies a unique application of the contingent payment auction mechanism by banks in the sale of nonperforming loans to privately-held asset management companies. We demonstrate a lack of separation in the auction mechanism used by banks, with the security bid being a combination of cash and debt in a predetermined proportion, leading to an inefficient public policy outcome. Our findings reveal the possibility of moral hazard and adverse selection associated with the contingent payment auction mechanism in the above setting. We also highlight issues involved in considering auction bids as fair market value.
We investigate the impact of demographic changes on local public services taking the case of water service. We apply a structural production function approach to a large panel of German water utilities between 2003 and 2014. Exploring variation of population density and the population age structure across service areas and over time, we provide evidence that demographics and their changes significantly affect the utilities’ productivity and costs. We find that demographic changes cause significant cost increases in rapidly shrinking and ageing regions. Our results provide important policy implications regarding the prevention of growing regional disparities in public services.
Soft budget constraint refers to the phenomenon that money losing inefficient projects keep on getting subsidies and operating. It was first phrased and analyzed by the late Hungarian economist Janos Kornai when he studied former socialist economies and by now, economists generally have agreed that soft budget constraint also exists extensively in market economies. As an important area of research in government and economics, existing explanations of soft budget have focused on the government's lack of commitment to terminate inefficient investment projects. In this paper, we propose a new theory in which soft budget constraint is an optimal governmental mechanism to induce greater effort in project selection. The idea is that if a manager (banker) selects a bad project, he has to keep on subsidizing it and lose more. Anticipating this, soft budget constraint makes the manager work hard to avoid choosing bad projects. Our theory sheds light on research in government and economics from the perspective of mechanism design.
We consider the Build–Operate–Transfer (BOT) contracts for a newly built road within a transportation network which includes another existing free access road. We consider a standard BOT contract in which the firm builds and operates the new road in the concession period and then transfers it to the government in the post-concession period. We find that the government may not prefer the length of concession period as long as possible. Next, we consider a coordinated BOT contract between the government and the firm to form a board to build and operate the new road over the whole life. In such a case, we transform a bi-objective programming problem as a weighted sum of the profit of firm and social welfare of the society. We find that social welfare may not always increase with the government’s weight. Besides, if the government weight is low, the coordinated BOT contract will lead to a wider road than the standard BOT contract, even if the construction cost is high. If the government weight is high, the coordinated BOT contract will lead to a wider road if the construction cost is very low. In other cases, the coordinated BOT contract leads to a narrower road compared to the standard BOT contract.
Academics, pundits, and policymakers have recently called for a stronger governmental role in the economy to tackle social issues such as inequality and grand challenges like global warming. Despite a general recognition among economists and management scholars that government efforts to guide and control innovation or subsidize private entrepreneurs have failed to yield results, these calls also describe an entrepreneurial state in which bureaucrats, not entrepreneurs, direct not only basic research but also applied technological development. Building on the notions of economic competence and ownership competence we argue that even well-intentioned and strongly motivated public actors lack the ability to manage the process of innovation, especially under Knightian uncertainty. As stewards of resources owned by the public, government bureaucrats do not exercise the ultimate responsibility that comes with ownership. Moreover, government ownership of firms and labs and government intervention in the management of privately owned assets hampers the competitive process of putting ownership of innovative firms and projects in the hands of individuals and groups with higher levels of ownership ability. We suggest that ownership competence differs systematically between public and private actors, particularly around innovation, with important implications for innovation policy.
Traditionally, the regulation of electricity networks was concerned mainly with revenue sufficiency, cost efficiency, and service quality. However, the transition of the electricity system means that economic regulation needs to align the operation of networks with wider decarbonisation objectives. Economic incentives provided to network firms need to create value for the society by encouraging them to engage in activities that facilitate the whole system optimisation and maximise the value of the network. Strong emphasis on short-run cost efficiency can result in reduction of technological and business model innovation at the network segment. Innovation is not only costly but also risky. This means regulatory frameworks need to consider the level of risk to which network companies are exposed to for their stage of innovation activity.KeywordsEconomic regulationElectricity distribution networksIncentive regulationRate-of-return regulationRIIO model
Water sector reforms have assumed importance with water crisis becoming acute and drastically affecting availability to domestic, agriculture and industrial sectors. Inefficiencies observed in the distribution and management of drinking water backed up by inability of public sector to make huge investments has attracted private participation. User participation, private investment and water pricing assumed to enhance efficiency are the ‘buzz words’ in the water sector. Public Private Partnership (PPP) models in water supply have been introduced in a few cities in India. To ease the crisis and provide lasting solution to the water problem in the twin cities of Hubli-Dharwad, the Karnataka Urban Water Sector Improvement Project (KUWASIP) has been implemented with
funding from World Bank and State government. The project, which provides continuous (24x7) water supply is initiated on pilot basis in 8 demo zones (wards) and is all set to be introduced in the remaining 59 wards of the twin cities. Providing 24x7 water supplies has the potential to improve health and quality of life through savings in time
spent on collecting water and costs of storing water, reduced contamination of water and hardships of collecting water at odd times. We conducted an impact evaluation of the pilot-scale conversion from intermittent to 24x7 water delivery in Hubli-Dharwad, Karnataka, India - one of the first cities in India to implement such a conversion. We compared areas of the city that received 24x7 delivery to areas that continued to be served by intermittent water supply (IWS) with a total sample of 3599 households to assess water usage, willingness to pay for water charges and, collected perceptions of consumers with regard to water quality, quantity and water tariff. The pilot project protected by 100% grant and coordination of enthusiastic stakeholders appears to be successful in terms of continuous supply of water, reduced non revenue water, increased billing and collection. But, in up scaling of the project to the entire city, the municipal corporation has to deal with cost sharing, new private operators, pending cases of arrears, subsidized rates, ensure coordination in implementation and availability of water throughout the year and, redefine its role as well that of government agencies, which in the long term could have implications on municipal governance and sustenance of the project .
This study presents empirical evidence that a health improvement program—privatization of municipal water services—in Argentina during the 1990s has had a negative effect on long-term human capital accumulation. Exploiting variations across regions and cohorts, I find that early childhood exposure to the program reduces years of schooling by around 0.5 years. The negative effect is more pronounced for males. I further use the previous census to examine the identical cohorts when they were at school age. I find that they are more likely to drop out of school and participate in the labor force after the program, and the effect is, again, more marked for boys. The finding is consistent with families preferring healthier children to go to work after improvements in health status.
We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. We show that these mechanisms, which are based on off-equilibrium arbitration clauses that impose large fines for lying and the inappropriate use of arbitration, have severe behavioral constraints because the fines induce retaliation against legitimate uses of arbitration. Incorporating reciprocity preferences into the theory explains the observed behavioral patterns and helps us develop a new mechanism that is more robust and achieves high rates of truth-telling and efficiency. Our results highlight the importance of tailoring implementation mechanisms to the underlying behavioral environment. (JEL C92, D44, D82, D86, D91)
Privatization refers to the public shares and Assets which are sold to the private sector in the economy. It decreases the power of government control and creates the other policies method. Privatization leads to cutting short the capital and revenue expenditure, which leads to an increase in share value in the market. During the pre-privatization period, the government used to pay less amounts of dividends to its shareholders due to its complex cost structure. Privatization leads to cutting short the capital and revenue expenditure, which leads to an increase in share value in the market. It also gave information about Public and Private sector banks. Our objective is to compare the pre and post-privatization performance like other banks of developing countries shows that privatization resulted in significant gains in profitability and efficiency. To evaluate the impact of privatization in the Indian banking sector and the relationship between privatization and Indian Economic growth by using a case study of IDBI bank condition of Indian private sector banks is analyzed using the financial statement of IDBI Bank with the help of different research methodologies.
The poor performance of the state owned electricity company the National Electric Power Authority (NEPA), has provided the impetus for the establishment of the Power Holding Company of Nigeria (PHCN). However, despite the power sector reforms in Nigeria the country has continued to face massive challenges in the generation and distribution of electricity.
The United Nations’ 2030 Agenda for Sustainable Development aims to promote inclusive and sustainable economic growth and encourage the formalization and growth of micro, small, and medium enterprises through access to financial services. This study examines the impact and mechanism of the digital financial inclusion on the sustainable growth of small and micro enterprises in China. For this purpose, it uses the data from China’s New Third Board Market listed companies from 2011 to 2018 and the digital financial inclusion index of Peking University. The results show that the development of digital financial inclusion helps promote the sustainable growth of small and micro businesses, particularly in private, high-tech industries, and competitive markets. The impact mechanism of this development prevents any financial crisis caused by the capital structure imbalance and capital liquidity problems of small and micro enterprises by alleviating the financing constraints, thus promoting their sustainable growth. The research results show that, under the background of high-quality development of China’s economy, continuous promotion of digital financial inclusion and reshaping of the ecological pattern of the financial industry can provide steady financial support for the sustainable growth of small and micro enterprises, and realize the healthy development of micro enterprises and macro economy.
The present study has made an effort to answer the vital question as to what extent the unmet infra needs of the economy have been addressed by the alternative strategy to the public budgeting through public–private partnerships (PPPs) in the Indian context. The analysis reveals that there exists a strong theoretical support base for PPP as an alternative to the public budgeting of infra services provision. The growth of PPP projects across the infra sub-sectors and various geographical regions has changed the public provisioning of infra services in India since the late 1990s. The few infra sub-sectors, mainly transport, limited to national highways (NHs), airports and urban infra projects being developed through PPP mode, whereas the health and education and rural infra projects continue to remain unattractive despite their huge inadequacy. The study also brings out the positive impact of competition on the project cost of PPPs, in terms of reducing the financial burden of governments. The results also reveal that ex-ante competition has an inverse association with the unit cost of projects in the case of select national highway PPPs. Finally, the study, based on an analysis of the quantitative and qualitative value for money (VfM), explains the financial and non-financial savings to the government and other users from the select NH projects. The quantitative VfM results prove that in respect of three out of the four select NH PPPs, the government has been able to save substantially (i.e. a sum of Rs. 1037 crore through PPP mode), while the qualitative VfM results prove that there are significant gains to the users in terms of a reduced travel time, fuel efficiency, travel time consistency, improved road safety and pothole-free roads.
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