THE THEORY AND EVIDENCE PERTAINING TO LOCAL GOVERNMENT MIXED ENTERPRISES

Abstract

ABSTRACT This paper addresses some of the gaps in both classification and theory pertaining to local government MEs and presents tentative predictions concerning the performance of local MEs. As a preliminary, we identify the different forms of entities with ME characteristics and place them within a comprehensive taxonomy. Most local MEs provide local public goods. Consequently, their primary goal should be to improve social welfare. This goal should drive both theory development and the evaluation of ME performance. We present three principal‐agent models that offer contrasting theories of ME performance with differing assumptions about the motivations and behaviour of the relevant actors: (1) a ‘best of both worlds’ model; (2) a ‘worst of both worlds’ model, and (3) a ‘profit collusion world’ model. We indirectly test these models by reviewing and assessing the empirical performance of MEs, focusing on their social welfare effects, or using related measures of performance where we have no direct evidence on social welfare effects. Finally, we draw on the theory and empirical evidence to make some predictions about the behaviour and performance of local MEs.

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