Ownership versus Environment: Why are Public Sector Firms Inefficient?

Ann P. Bartel · Ann Harrison

14 citations0/0 files storedNational Bureau of Economic Research

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Corporate Finance and Governance Merger and Competition Analysis Law, Economics, and Judicial Systems

Abstract

The argument for privatizing the corporation, of course, is that private owners, driven by the profit incentive, will operate the company more efficiently."--Louis Uchitelle, The New York Times, May 31, 1998."Few privatized companies have become more efficient or profitable".--Venyamin Sokolov on Russia, The New York Times, June 1, 1998.Why privatize?One primary objective of privatization is to enhance the efficiency of public enterprises.This is the perspective put forth by Louis Uchitelle in an interview with Joseph Stiglitz in last May's New York Times.One day later, an editoral by the director of Russia's General Accounting Office appeared, pointing out that very few of Russia's privatized firms have actually increased efficiency.Clearly, the evidence to date on the superior performance of privatized plants is incomplete.Megginson et al.(1994) conclude their review of the evidence by stating that the wave of privatizations carried out over the last decade were based on blind faith.Laffont and Tirole, in their (1993) book, echo that point, remarking that "the empirical literature on the relative efficiency of the two ownership structures is itself currently inconclusive".Although many studies find that public sector plants perform poorly relative to their private sector counterparts (Boardman and Vining (1989), Kikeri, Nellis, and Shirley (1992), La Porta and Lopez-de-Silanes (1997)), other studies get mixed or ambigious results (Funkhouser and MacAvoy (1979), Groves, Hong, McMillan andNaughton (1994)).One explanation for the conflicting evidence is that the efficiency gains from privatization depend on a variety of factors, including the degree of competition, the regulatory environment,

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References

1994Politicians and Firms 1994The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis 1981The measurement and sources of technical inefficiency in the Indonesian weaving industry 1991Economic Perspectives on Privatization 1998The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries 1994Autonomy and Incentives in Chinese State Enterprises 2012Production Functions: The Search for Identification 1994Internal versus External Capital Markets

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