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Ownership and input prices: A comparison of public and private enterprises
L,
economics ELSEVIER
Economics Letters 53 (1996) 33-38
Ownership and input prices: A comparison of public and private enterprises Henry Ohlsson* Department of Economics, Uppsala University, Box 513, S-751 20 Uppsala, Sweden Received 29 December 1995; revised version received 23 July 1996; accepted 6 August 1996 Abstract
1 compare public and private enterprise performance using input prices. The data are from primary and secondary market purchases in Sweden of a homogeneous capital item- 800 garbage trucks. Private firms pay 10-15% less than public enterprises.
Keywords: Public ownership; Input price bargaining; Economic depreciation; Privatization JEL classification: D24; E22; L32; L33
1. Introduction The discussion about the performance differences between private and public enterprises, e.g. in the literature on ptivatization, clearly illustrates the difficulties in measuring firm performance. Private and public enterprises may differ in objectives so that public enterprises do not exploit their market position (instead they maximize social welfare) while profitmaximizing private firms may do so if there is not enough competition. With competition, on the other hand, private firms will not extract monopoly rents. The assumption that costs are always minimized, for any produced quantity, can be relaxed using a principal-agent perspective. In this situation, private and public enterprises may differ in how managers are monitored or in the incentive structure of managers. It is often conjectured that public enterprises will be less efficient internally because of too low cost-reducing efforts of public managers. This results in slack or X-inefficiency (Leibenstein, 1969). There may, therefore, exist a trade-off between allocative efficiency in output markets, on the one hand, and internal efficiency, on the other. Laffont and Tirole (1993) stress that * Correspondence to: Henry Ohlsson, Department of Economics, Uppsala University, Box 513, S-751 20 Uppsala, Sweden. Tel.: +46 1818 1096; fax: +46 1818 1478; email [email protected]. 0165-1765/96/$12.00 © 1996 Elsevier Science S.A. All rights reserved PI! S0165-1765(96)00883-X
34
H. Ohlsson / Economics Letters 53 (1996) 33-38
"public ownership reduces the acquisition of information about the firm's managers' activity by outsiders, namely stock market participants" (p. 642). When empirically comparing the performance of private and public enterprises, costs and profits are the evaluation criteria most often used. However, profits measure allocative and internal efficiency poorly when there is no competition. This is an argument for using costs instead. Usually it is assumed that firms are price-takers on input markets and that cost differences result from differences in the input quantities used. The main idea in this paper is to study differences in input prices instead of costs ¢,r profits. When input prices are subject to bargaining, public and private firms may differ in bargaining strength and in the incentives for managers to bargain hard for the same reasons as those giving rise to differences in cost-reducing efforts. The cost functions used in the benchmark models of ownership found in Vickers and Yarrow (1988) and B6s (1991), where costs depend on output and effort, are general enough to incorporate effort differences implicitly showing up in input prices. I use data on input prices paid for garbage trucks. The data set comes from a survey made by the Swedish Competition Authority in 1989 covering the garbage collection in 115 of Sweden's 284 municipalities. In 56 municipalities, the collection w a s - completely (35) or partly (21)-done by the local government. In the remaining 59 municipalities, private firms were the sole collectors. All in all 95 private firms and 55 public firms (local governments) were involved. One of the questions concerned the vehicles the public or private firm owned in 1987. Complete information on loading capacity, purchase year, model year, purctlase price excluding value added tax, purchaser, etc. for 764 vehicles is available. Both purchases of new (703) and old (61) vehicles are included. Slightly more than half of the vehicles are owned by private firms. There are two advantages with this data set that should be stressed. First, the vehicles are homogeneous capital items in the sense that they can only be used for a specific activitygarbage collection. Secondly, the value of these trucks should come solely from their functionality. No attributes, such as color, design, status of the manufacturer, etc. should affect the prices for rational purchasers.
2. Evidence
The measure of input prices I use as dependent variable in the estimations is the nominal price paid for the truck. The price is assumed to depend on several factors such as the age of the truck and the purchase year. Changes in the general truck price level will then show up in the estimated effect of purchase year. There are, moreover, no reasons to believe that the price is homogeneous of degree one in loading capacity, i.e. that the price per ton capacity is constant. Instead l test whether the price per ton capacity decreases with increased capacity. In addition, trucks with compressors are, of course, expected to be more expensive for given capacity. I also include a dummy variable for trucks bought by buyers with many trucks to test whether the size of the firm gives greater bargaining power when buying trucks. Controlling for these other variables it is possible to isolate the ownership effect. The basic econometric model estimated is
H. Ohlsson / Economics Letters 53 (1996) 33-38
In pi =/3 o +/31 private~ + 13z s~ + [33t~ + [34 In cap~ -~ .85 comp~ + [36 bigfleet~ + e~ ,
35
(1)
where In Pi is the log of the truck price for vehicle i, private~ is a dummy variable for trucks owned by private firms, s i is the age of the truck (computed as the difference between the purchase year and the model year), 1 t~ is the purchase year, In capi is the log of the truck capacity in tons, compi is a dummy variable for trucks with compactt3rs, bigfleeti is a dummy variable for trucks belonging to fleets with more than ten tr~cks, and e~ an error term. The choice of cutoff between small and big fleets is, of course, arbitrary. It turns out that the choice here results in a fifty-fifty split. Table 1 reports the means of the variables. Column (1) in Table 2 reports the OLS results. Private firms pay 14% less than local governments. This is consistent with the hypothesis of higher internal efficiency of private firms. The annual geometric depreciation rate is estimated as 23%. The average annual price increase, estimated as the coefficient for the purchase year, is 11%. There are clearly strong scale economies for trucks as the price elasticity with respect to capacity is less than one. Vehicles with compactors are considerably more expensive than those without. The survey respondents estimate that a compressor triples the capacity of the vehicle. The net decrease in price per ton capacity produced by a compressor is therefore 6%, (1-/34) in 3 - / 3 s = 0 . 6 5 0.59. It is interesting to note that the cost is very close to the gain, which we would expect from a market equilibrium. Buyers with big fleets seem to pay somewhat less, although the estimated parameter is not significant. 2 Table 1 Sample means; standard deviations within parentheses Total in Price
Private firm
Public firms
Private firms
5.55
5.77
5.38
(0.75)
(0.48)
(0.87)
0.57
Age
0.32 (1.47)
0.10 (0.80)
0.49 (1.80)
Purchase year
1982.0 (3.50)
1982.2 (3.41)
1981.9 (3.58)
in Capacity
2.45 (0.48)
2.53 (0.33)
2.39 (0.56)
Compactors
0.83
0.90
0.78
Big fleet
0.51
0.50
0.52
i As the model year starts in fall the year before the calendar year, the minimum value of age is -1. 2 1 have also tried the number of vehicles in the fleet as explanatory variable without getting significant results. The estimations are not reported here. Including county dum~ies doe~ not make that much difference either.
36
H. Ohlsson / Economics Letters 53 (1996) 33-38
Table 2 Estimation results
(1)
(2) -0.16 (4.79)
(3)
(4)
-0.14 (4.08)
-0.15 (4.41)
-0.23 (19.5)
12.0 dummies
Private finn
-0.15 (4.42)
Age
-0.23 (20.1)
12.0 dummies
Purchase year
0.11 (23.5)
0,11 (23.6)
19.0 dummies
19,0 dummies
In Capacity
0,41 (10.9)
0.42 (11.2)
0.40 (10.6)
0,40 (10.9)
Compactor
0.59 (12.3)
0.61 (12.6)
0.61 (12.7)
0.62 (13.0)
Big fleet
-0,029 (0.87)
-0.031 (0.93)
-0.043 (1.30)
-0.045 (1.37)
3.39 (7.52)
2.21 (3.55)
-216.9 (23.1)
-216.4 (23.2)
R2
0.65
0.66
0.67
0.68
/~ 2
0.64
0.65
0,66
0.67
SEE
0.45
0,44
0.44
0.43
Constant
F
231,0
85,9
61.5
44.4
Notes: Absolute t-values within parentheses.
The number of observations is 764,
The other columns in Table 2 report variations in the basic specification. The continuous specifications of age and purchase year are replaced by dummy variables. This does not change the estimated ownership effect or any other coefficient considerably either. There is a discussion about the functional form of the depreciation pattern in the literature. It is often argued that it is too restrictive to capture depreciation with a single parameter. I have estimated models built on Box-Cox power transformations in the traditiol~ of" II~lte~ aad Wykoff (1981). The estimations results are available on request. Solving the estimated models for the ownership effects reveals that private firms, according to these estimations, pay 11% less conditional on the mean values for age, purchase year, and capacity and that the truck has a compressor and belongs to a small fleet. I have also checked the sensitivity of the results by estimating model (1) for different subsamples. Table 3 reports the results. The separate estimations for private and public
37
H. Ohlsson / Economics Letters 53 (1996) 33-38
Table 3 Estimation results, subsamples Full sample
Public firms
Private firm
-0.15 (4.42)
Age
-0.23 (20.1)
-0.24 (12.4)
Purchase year
0.11 (23.5)
In Capacity
Private firms
New
Old
-0.15 (4.58)
-0.06 (0.27)
-0.23 (15.9)
-0.25 (1.60)
-0.24 (10.0)
0.09 (21.1)
0.12 (16.9)
0.11 (23.2)
0.13 (5.17)
0.41 (10.9)
0.39 (7.72)
0.43 (8.54)
0.44 (11.0)
0.26 (2.20)
Compactor
0.59 (12.3)
0.30 (5.57)
0.68 (9.76)
0.59 (11.5)
0.58 (3.30)
Big fleet
-0.029 (0.87)
-0.14 (4.54)
0.044 (0.82)
-0.025 (0.74)
-0.034 (0.20)
Constant
-216.9 (23.1)
- 182.7 (20.6)
-242.3 (16.6)
-215.0 (22.7)
-252.8 (5.06)
R:
0.65
0.68
0.63
0.59
0.69
/~ 2
0.64
0.68
0.63
0.58
0.65
SEE
0.45
0.27
0.53
0.44
0.57
F
231.0
137.7
146.4
165.2
19.7
NutrSer of observations
764.0
329.0
435.0
703.0
61.0
Notes: Absolute t-values within parentheses.
enterprises give very similar parameter estimates except for big fleets, compactors and the constant. As is clear from the sample means in Table 1, fewer private vehicles have compressors. I find a significant fleet size effect for public firms, but not for private firms. Public firms pay more than private, but the difference compared with private firms is smaller for public firms with big fleets than those with small fleets. When interpreting this, bear in mind that it is not obvious where to draw the line between small and big fleets. There are few old vehicles in the sample- less than 10%. The parameter estimates for new and old vehicles are, nevertheless, also similar. The estimated ownership effect is not significant, but when interpreting this it should be emphasized that there are only seven publicly owned old vehicles.
38
H. Ohlsson / Economics Letters 53 (1996) 33-38
3. Conclusion The main conclusion of the paper is that it is possible to gain further insights on the effects of ownership by comparing the performance of public and private firms using input prices paid. In this application I find that private firms pay less than public firms for their garbage trucks. I estimate the difference to be 10-15%.
Acknowledgements The Swedish Competition Authority finances the research and has also collected and provided the data. An anonymous referee, Jonas Ahlander, S6ren Blomquist, Nils Gottfries, Thomas Lindh, Michael Lundholm, and seminar participants at Uppsala University gave useful comments and suggestions. References B6s, D., 1991, Privatization: A theoretical treatment (Oxford University Press). Hulten, C.R. and F.C. Wykoff, 1981, The estimation of economic depreciation using vintage asset prices, Journal of Econometrics 15, 367-396. Laffont, J.J. and J. Tirole, 1993, A theory of incentives in procurement and regulation (MIT Press, Cambridge, MA). Leibenstein, H., 1969, Organizational or frictional equilibria, X-inefficiency, and the rate of innovation, Quarterly Journal of Economics 83, 600-623. Vickers, J. and G. Yarrow, 1988, Privatization: An economic analysis (MIT Press, Cambridge, MA).
economics ELSEVIER
Economics Letters 53 (1996) 33-38
Ownership and input prices: A comparison of public and private enterprises Henry Ohlsson* Department of Economics, Uppsala University, Box 513, S-751 20 Uppsala, Sweden Received 29 December 1995; revised version received 23 July 1996; accepted 6 August 1996 Abstract
1 compare public and private enterprise performance using input prices. The data are from primary and secondary market purchases in Sweden of a homogeneous capital item- 800 garbage trucks. Private firms pay 10-15% less than public enterprises.
Keywords: Public ownership; Input price bargaining; Economic depreciation; Privatization JEL classification: D24; E22; L32; L33
1. Introduction The discussion about the performance differences between private and public enterprises, e.g. in the literature on ptivatization, clearly illustrates the difficulties in measuring firm performance. Private and public enterprises may differ in objectives so that public enterprises do not exploit their market position (instead they maximize social welfare) while profitmaximizing private firms may do so if there is not enough competition. With competition, on the other hand, private firms will not extract monopoly rents. The assumption that costs are always minimized, for any produced quantity, can be relaxed using a principal-agent perspective. In this situation, private and public enterprises may differ in how managers are monitored or in the incentive structure of managers. It is often conjectured that public enterprises will be less efficient internally because of too low cost-reducing efforts of public managers. This results in slack or X-inefficiency (Leibenstein, 1969). There may, therefore, exist a trade-off between allocative efficiency in output markets, on the one hand, and internal efficiency, on the other. Laffont and Tirole (1993) stress that * Correspondence to: Henry Ohlsson, Department of Economics, Uppsala University, Box 513, S-751 20 Uppsala, Sweden. Tel.: +46 1818 1096; fax: +46 1818 1478; email [email protected]. 0165-1765/96/$12.00 © 1996 Elsevier Science S.A. All rights reserved PI! S0165-1765(96)00883-X
34
H. Ohlsson / Economics Letters 53 (1996) 33-38
"public ownership reduces the acquisition of information about the firm's managers' activity by outsiders, namely stock market participants" (p. 642). When empirically comparing the performance of private and public enterprises, costs and profits are the evaluation criteria most often used. However, profits measure allocative and internal efficiency poorly when there is no competition. This is an argument for using costs instead. Usually it is assumed that firms are price-takers on input markets and that cost differences result from differences in the input quantities used. The main idea in this paper is to study differences in input prices instead of costs ¢,r profits. When input prices are subject to bargaining, public and private firms may differ in bargaining strength and in the incentives for managers to bargain hard for the same reasons as those giving rise to differences in cost-reducing efforts. The cost functions used in the benchmark models of ownership found in Vickers and Yarrow (1988) and B6s (1991), where costs depend on output and effort, are general enough to incorporate effort differences implicitly showing up in input prices. I use data on input prices paid for garbage trucks. The data set comes from a survey made by the Swedish Competition Authority in 1989 covering the garbage collection in 115 of Sweden's 284 municipalities. In 56 municipalities, the collection w a s - completely (35) or partly (21)-done by the local government. In the remaining 59 municipalities, private firms were the sole collectors. All in all 95 private firms and 55 public firms (local governments) were involved. One of the questions concerned the vehicles the public or private firm owned in 1987. Complete information on loading capacity, purchase year, model year, purctlase price excluding value added tax, purchaser, etc. for 764 vehicles is available. Both purchases of new (703) and old (61) vehicles are included. Slightly more than half of the vehicles are owned by private firms. There are two advantages with this data set that should be stressed. First, the vehicles are homogeneous capital items in the sense that they can only be used for a specific activitygarbage collection. Secondly, the value of these trucks should come solely from their functionality. No attributes, such as color, design, status of the manufacturer, etc. should affect the prices for rational purchasers.
2. Evidence
The measure of input prices I use as dependent variable in the estimations is the nominal price paid for the truck. The price is assumed to depend on several factors such as the age of the truck and the purchase year. Changes in the general truck price level will then show up in the estimated effect of purchase year. There are, moreover, no reasons to believe that the price is homogeneous of degree one in loading capacity, i.e. that the price per ton capacity is constant. Instead l test whether the price per ton capacity decreases with increased capacity. In addition, trucks with compressors are, of course, expected to be more expensive for given capacity. I also include a dummy variable for trucks bought by buyers with many trucks to test whether the size of the firm gives greater bargaining power when buying trucks. Controlling for these other variables it is possible to isolate the ownership effect. The basic econometric model estimated is
H. Ohlsson / Economics Letters 53 (1996) 33-38
In pi =/3 o +/31 private~ + 13z s~ + [33t~ + [34 In cap~ -~ .85 comp~ + [36 bigfleet~ + e~ ,
35
(1)
where In Pi is the log of the truck price for vehicle i, private~ is a dummy variable for trucks owned by private firms, s i is the age of the truck (computed as the difference between the purchase year and the model year), 1 t~ is the purchase year, In capi is the log of the truck capacity in tons, compi is a dummy variable for trucks with compactt3rs, bigfleeti is a dummy variable for trucks belonging to fleets with more than ten tr~cks, and e~ an error term. The choice of cutoff between small and big fleets is, of course, arbitrary. It turns out that the choice here results in a fifty-fifty split. Table 1 reports the means of the variables. Column (1) in Table 2 reports the OLS results. Private firms pay 14% less than local governments. This is consistent with the hypothesis of higher internal efficiency of private firms. The annual geometric depreciation rate is estimated as 23%. The average annual price increase, estimated as the coefficient for the purchase year, is 11%. There are clearly strong scale economies for trucks as the price elasticity with respect to capacity is less than one. Vehicles with compactors are considerably more expensive than those without. The survey respondents estimate that a compressor triples the capacity of the vehicle. The net decrease in price per ton capacity produced by a compressor is therefore 6%, (1-/34) in 3 - / 3 s = 0 . 6 5 0.59. It is interesting to note that the cost is very close to the gain, which we would expect from a market equilibrium. Buyers with big fleets seem to pay somewhat less, although the estimated parameter is not significant. 2 Table 1 Sample means; standard deviations within parentheses Total in Price
Private firm
Public firms
Private firms
5.55
5.77
5.38
(0.75)
(0.48)
(0.87)
0.57
Age
0.32 (1.47)
0.10 (0.80)
0.49 (1.80)
Purchase year
1982.0 (3.50)
1982.2 (3.41)
1981.9 (3.58)
in Capacity
2.45 (0.48)
2.53 (0.33)
2.39 (0.56)
Compactors
0.83
0.90
0.78
Big fleet
0.51
0.50
0.52
i As the model year starts in fall the year before the calendar year, the minimum value of age is -1. 2 1 have also tried the number of vehicles in the fleet as explanatory variable without getting significant results. The estimations are not reported here. Including county dum~ies doe~ not make that much difference either.
36
H. Ohlsson / Economics Letters 53 (1996) 33-38
Table 2 Estimation results
(1)
(2) -0.16 (4.79)
(3)
(4)
-0.14 (4.08)
-0.15 (4.41)
-0.23 (19.5)
12.0 dummies
Private finn
-0.15 (4.42)
Age
-0.23 (20.1)
12.0 dummies
Purchase year
0.11 (23.5)
0,11 (23.6)
19.0 dummies
19,0 dummies
In Capacity
0,41 (10.9)
0.42 (11.2)
0.40 (10.6)
0,40 (10.9)
Compactor
0.59 (12.3)
0.61 (12.6)
0.61 (12.7)
0.62 (13.0)
Big fleet
-0,029 (0.87)
-0.031 (0.93)
-0.043 (1.30)
-0.045 (1.37)
3.39 (7.52)
2.21 (3.55)
-216.9 (23.1)
-216.4 (23.2)
R2
0.65
0.66
0.67
0.68
/~ 2
0.64
0.65
0,66
0.67
SEE
0.45
0,44
0.44
0.43
Constant
F
231,0
85,9
61.5
44.4
Notes: Absolute t-values within parentheses.
The number of observations is 764,
The other columns in Table 2 report variations in the basic specification. The continuous specifications of age and purchase year are replaced by dummy variables. This does not change the estimated ownership effect or any other coefficient considerably either. There is a discussion about the functional form of the depreciation pattern in the literature. It is often argued that it is too restrictive to capture depreciation with a single parameter. I have estimated models built on Box-Cox power transformations in the traditiol~ of" II~lte~ aad Wykoff (1981). The estimations results are available on request. Solving the estimated models for the ownership effects reveals that private firms, according to these estimations, pay 11% less conditional on the mean values for age, purchase year, and capacity and that the truck has a compressor and belongs to a small fleet. I have also checked the sensitivity of the results by estimating model (1) for different subsamples. Table 3 reports the results. The separate estimations for private and public
37
H. Ohlsson / Economics Letters 53 (1996) 33-38
Table 3 Estimation results, subsamples Full sample
Public firms
Private firm
-0.15 (4.42)
Age
-0.23 (20.1)
-0.24 (12.4)
Purchase year
0.11 (23.5)
In Capacity
Private firms
New
Old
-0.15 (4.58)
-0.06 (0.27)
-0.23 (15.9)
-0.25 (1.60)
-0.24 (10.0)
0.09 (21.1)
0.12 (16.9)
0.11 (23.2)
0.13 (5.17)
0.41 (10.9)
0.39 (7.72)
0.43 (8.54)
0.44 (11.0)
0.26 (2.20)
Compactor
0.59 (12.3)
0.30 (5.57)
0.68 (9.76)
0.59 (11.5)
0.58 (3.30)
Big fleet
-0.029 (0.87)
-0.14 (4.54)
0.044 (0.82)
-0.025 (0.74)
-0.034 (0.20)
Constant
-216.9 (23.1)
- 182.7 (20.6)
-242.3 (16.6)
-215.0 (22.7)
-252.8 (5.06)
R:
0.65
0.68
0.63
0.59
0.69
/~ 2
0.64
0.68
0.63
0.58
0.65
SEE
0.45
0.27
0.53
0.44
0.57
F
231.0
137.7
146.4
165.2
19.7
NutrSer of observations
764.0
329.0
435.0
703.0
61.0
Notes: Absolute t-values within parentheses.
enterprises give very similar parameter estimates except for big fleets, compactors and the constant. As is clear from the sample means in Table 1, fewer private vehicles have compressors. I find a significant fleet size effect for public firms, but not for private firms. Public firms pay more than private, but the difference compared with private firms is smaller for public firms with big fleets than those with small fleets. When interpreting this, bear in mind that it is not obvious where to draw the line between small and big fleets. There are few old vehicles in the sample- less than 10%. The parameter estimates for new and old vehicles are, nevertheless, also similar. The estimated ownership effect is not significant, but when interpreting this it should be emphasized that there are only seven publicly owned old vehicles.
38
H. Ohlsson / Economics Letters 53 (1996) 33-38
3. Conclusion The main conclusion of the paper is that it is possible to gain further insights on the effects of ownership by comparing the performance of public and private firms using input prices paid. In this application I find that private firms pay less than public firms for their garbage trucks. I estimate the difference to be 10-15%.
Acknowledgements The Swedish Competition Authority finances the research and has also collected and provided the data. An anonymous referee, Jonas Ahlander, S6ren Blomquist, Nils Gottfries, Thomas Lindh, Michael Lundholm, and seminar participants at Uppsala University gave useful comments and suggestions. References B6s, D., 1991, Privatization: A theoretical treatment (Oxford University Press). Hulten, C.R. and F.C. Wykoff, 1981, The estimation of economic depreciation using vintage asset prices, Journal of Econometrics 15, 367-396. Laffont, J.J. and J. Tirole, 1993, A theory of incentives in procurement and regulation (MIT Press, Cambridge, MA). Leibenstein, H., 1969, Organizational or frictional equilibria, X-inefficiency, and the rate of innovation, Quarterly Journal of Economics 83, 600-623. Vickers, J. and G. Yarrow, 1988, Privatization: An economic analysis (MIT Press, Cambridge, MA).