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Private or Public? Towards a Taxonomy of Optimal Ownership and Management Regimes*

Authors

  • STEPHEN KING,

    1. Australian Competition and Consumer Commission, Canberra, Australian Capital Territory, Australia
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    •  The views expressed in this article are those of the authors only and do not represent the views of the Australian Competition and Consumer Commission.

  • ROHAN PITCHFORD

    1. Department of Economics, The University of Sydney, Sydney, Australia
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  • *

     Special thanks to Luigi Zingales for his insightful comments as a discussant at the AEA meetings. We would also like to thank Russell Cooper, Dhammika Darmapala, Joshua Cans, Oliver Hart, Philippe Jehiel, Marco Ottavianni, participants at the AEA meetings in Chicago and the Australasian econometrics society meetings, economics theory workshop participants at the Australian National University, and seminar participants at University College London, The University of Melbourne, Monash University and The University of Western Sydney for their feedback on various manifestations of this paper. All remaining errors are our own.

: Rohan Pitchford, Department of Economics, The University of Sydney, Sydney, Australia. Email: r.pitchford@econ.usyd.edu.au

Abstract

We develop a model to assist policy-makers in their choice between private and public ownership for a broad range of activities, based on managers’ ability to divert resources through perks or pet projects. Qualitative information is always required to demonstrate that public ownership is optimal. More ‘public’ firms are synonymous with greater control of such actions, but generate greater bureaucracy costs. The flat incentives faced by public managers 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. Applications are discussed.

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