Working Paper: NBER ID: w2196
Authors: David E. M. Sappington; Joseph E. Stiglitz
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 mod- concerns the transactions cats 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 fact 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.
Keywords: Privatization; Public vs. Private Provision; Transaction Costs; Incentives
JEL Codes: L33; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public ownership (L32) | lower transaction costs for government intervention (H19) |
| lower transaction costs for government intervention (H19) | benefits and costs associated with intervention (O22) |
| government retains greater authority to intervene in public enterprises (L32) | more effective oversight (G38) |
| privatization theorem (L33) | government involvement cannot improve upon private production (P16) |
| competitive bidding (D44) | efficient outcomes (D61) |
| government's inability to commit credibly to non-intervention (H12) | distorted incentives and inefficiencies (D61) |