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Does ownership always matter?
International Journal of Industrial Orga
olland
4”*r L*
London School of Economics, London WC2A ZAE, V
Centre d’etude des Revenus et des Coiits, 75007Paris, France
The objective of this paper is to explain and illustrate the complex relationship between ownership arrangements and enterprise performance. It is commonly argued that efficiency will be lower in the public sector than the private because enterprise objectives deviate from maximisation of profits and because monitoring arrangements are inadequate due to the absenti of capital market discipline. We argue that public ownership does make the owner-manager relationship more complicated because the chain of principals and agems is expanded; ojectives are politically determined; and these are conveyed by a policy-making administrative structure to management. But the relative efficiency of pttblic as against private ownership actually depends on the eEp ll:cacv of capital market monitoring: on the political and constitutional svstem; on the inf~rrn9tinn L11.b L... _I.“.& &d sanctions available to policy makers; and on the nature of the management market. Variation in these factors can help to explain the different natures and roles of the public sector between countries.
This paper investigates the implications for company public ownership, in comparison with the effectiveness of th to be exercised by the capital market on private firms. our understanding of the different natures and roles sectors in different countries, especially in inspired our analysis. the last decade, changes in P ic policy in both countries.
sources of support are gratefully acknowledged.
pressures said
S. Estrin and V. Pkotin,
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Does ownership always matter?
towards privatisation, selling about 1E29billion worth of public assets to t te sector in 1979-90. France followed in 1986-88 by privatising e firms that the considerable nationalisation programme of 19 brought into the public sector. i This policy was discontinued in 11988but nationalised conglomerates continue to enjoy substantial flexibility in the acquisition and sale of part1y-owned subsidiaries. Some of the rationales put forward in ritain for ownership changes seem to be in direct contradiction with th arguments used in France. For example, an important aim of ritish privatisations was to improve the efficiency of the firms concerned y making them subject to the disciplining pressures of the capital market. Yet French nationalisations, also meant to improve efficiency, were seen precisely as a remedy to the deficiencies of the capital market [see de Bandt (1988)]. Differences in performance have been established between nationalised and privately owned firms in various countries although not always in the same direction [see, for example, Caves and Christiansen (i980), Pryke ( i982), Borcherding et al. (1982) and Bees (1984)], and performance changes associated with privatisation or nationalisation have been observed within particular firms in Britain and France. However, Molyneux and Thompson (1987) suggest that performance improved befire privatisation in several British cases. Nationalisation has been associated with performance improvement in France overall but no deterioration appeared after privatisation, which seems to have had a neutral or perhaps positive effect on most of the companies concerned [Encaoua and Santini ( 1989)J Efficiency differences between public and private firms have traditionally been attributed to differences in objectives and in the nature of markets upon which the :*vo types of firm trade. The tendency for public sector production to be clustered in markets with monopolistic or severely imperfect industrial structures has led to the suggestion that privatisation is necessary to introduce a measure of competition and market discipline into public sector * ies [see Littlechild (1978), Beesley and Littlechild j1983)]. x of nationalised firms operate in competition with the pr over group before privatisation in Britain; ETF Acquitaine ante). Furthermore, as Vickers and Yarrow (1985, 1988) stress, problems of misallocation deriving from market structure are logically distinct from the question of ownership form and can principle be dealt with by regulation rather than ownership form [see also acock ( 1984), Kay and erston ( 1984)].2 ‘This had raised the state’s share in the production of national output from around 11% to 16%.
ritain the debate shifted away from
S. Estrin and V. Pirotin, Does ownership always matter?
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The presence of mo nopolies in the public sector is related to t for nationalisatio ifferent objectives. and ‘under-investment’. arket failures, including natural monopolies, licy-makers have broadened the category to include the supply of products in ‘the nation interest’ such as arms manufacture, transport systems and infrastructure. istributional and equity goals have also been invoked [see ryke (1981), Rees (1984), If public and private sector firms were only distinguished by differences in objectives, it would Mow that a public corporation, given the objective of profit-maximisation, would perform as well as a capitalist firm, holding market structure constant. This would render privatisation unnecessary. Yet privatisers have grandiose claims. Privatisation, it is suggested, will reduce bureaucracy, waste and inefficiency. The argument is based on differences in the internal structure and incentives within the firm associated with ownership form. Public ownership is said to remove capital market incentives to monitor managers’ performance, allowing them to lead a ‘comfortable life’ [Pryke (1981)] at the expense of public resources [see, e.g. de Alessi (1980)]. This paper focuses on internal arrangements and the implications of the weakening of capital market pressures on the public sector. However, we will argue that the world is rather more complicated and that there are variations in the effectiveness of capital market monitoring as well as in institutional arrangements within the public sector and across countries. A now familiar approach to questions of internal organisation is that of principal-and-agent models. This emphasises the role of institutional arrangements in overcoming problems of information costs and risk sharing in situations where somebody acts on somebody else’s behalf for a remuneration [see Rees (1985b), Arrow (1986)]. ‘*hen o-wnership and management are separate, their particular institutional relationship -~-ill contribute to determine the firm’s actual behaviour, and the extent to which it deviates from its owners’ objectives. This suggests that different regimes of ownership, involving different agents, informational structures and incentives, may result in different behaviour regardless of the owners’ objectives. In the following s mechanisms of capital and managerial market
58
S. Estrin and V: Pbotin,
Does ownership always matter?
and management do not coincide, as occurs i orporations, owners ‘commission’ management to act in ems may arise because managers have interests that f owners, and owners do not have complete information. order to generate a coincidence of interests, owners (the ‘principal’) will esign a contract incorporating in managers’ remuneration a set of rewards and penalties associated with optimal and suboptimal behaviour. Since the agreement is drawn up before the outcome is known, and the income to be shared is not exclusively dependent on management’s behaviour, the contract may provide for some risk-sharing. Owners’ ability to enforce behaviour consistent with their objectives depends on the information they can obtain, directly or indirectly, about the optimality of managers’ actions. henever management has an informational advantage, owners have to protect themselves against the risks of ‘hidden action’, see Arrow (1986) or adverse selection by managers. As information becomes costlier, more incentives will have to be incorporated into contracts, for instance by increasing the risk to management Grough higher penalties and rewards [Rees (1985a), Shave11 4 1979)]. In the private profit-rraaximising corporation, the informational and incentives structures are usually described as follows. Managers, who are paid to maximise profit for owners, are assumed to pursue prestige and power as well as monetary objectives. They will try to increase their benefits and to promote company growth at the expense of profit [Williamson (1963, 1980)]. s bear most of the risk, but cannot observe managers’ actions ey are kept informed of the company’s pe rmance by regularly ccounts and through the share price illward and Parker he company can also be compared with others in the same sector the impact of external events on its performance. ever-31types of sanctions and z-n-+;~~pc Ill~~rrr~. vu are used to induce managers to refit. The market for shares gives o*wncrs a since they can withdraw their assets by selling stock.
S. Estrin and K Ptrotin, Does ownership dways matter?
and use information are particularly public sector. The first is 5vhe number of small stockholders.
relevant
for a
f33mm?p&iiSQn
59
with
the
numerous small shareholders are often seen as a pr group utility function [Rees (f98!5a)], but this ignores the economies of scale present in matters of information and decision&raking when information is costly. As remarked by aterson (f985), it may be too costly shareholder to
3.1. A conventionalview
In fitting the public sector organisation to this setup, the first problem is of private shareholder to identify the owners. view [see Alchian and
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S. Estrin and K Phrotin, Does ownership always matter.?
to compensate, Nationalised firms are in fact usually monitored by civil servants who are not necessarily the best people to evaluate car Furthermore, the share price represents a conflagration of different expectations, Different agents with diverse attitudes towards current performance and future prospects buy and sell shares according to the divergence between their expectations and the current market price. As long as these expectations are formed independently, the ruling share price therefore emerges via a pooling of information, and represents a more thorough and diffuse monitoring than could be undertaken by a single agency. Thus, however efficient the state’s monitoring activities, they seem likely to be inferior to the private market. The absence of a market for shares similarly removes sanctions for bad performance and incentives to managers in the public sector. Civil servants, who are not entitled to any of the financial gains due to improved efficiency, -willhave no incentive to monitor public firms. Members of the public do not have the possibility of shifting their assets away from unprofitable ventures, lowering share prices and informing potential bidders that the companies’ assets are not earning the maximum possible return. The absence of shareholders’ rebellions or takeovers removes a crucial check on public sector performance, leaving management far more discretion than in the case private ownership [see Lindsay (198G), Kay and Silberston (1984), illward and Parker (1983)]. Public corporations are sometimes even thought to have a ‘soft budget constraint’ [Kornai (198G)] with virtually unlimited access to government funds, so the company runs no risk of bankruptcy, no matter how inefficient its management.’ The absence of tradeable shares also rules out incentive schemes tying management remuneration in part to the performance of the firm via the share price, for le through share option plans. One must presume that all this can lead lack in nationalised corporations [de Alessi (198G)]. trade unions appropriate
S. Estrin and K PProtin, Dotis ownershi;
always matter?
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3.2. An alternative framework
is our contention that
this conventional approach, t insightful, cannot successfully explain inter-country variations in the sc=qe and efkiency of the public sect because it over-simplifies the issues to the advantage of the private sector. e therefore intend to extend the framework in two directions. irst, by analysing the complex chain of relations the voting publi to company managers via the state a replaces tradeable shares for public corporations. This und gence of an assortment of public sector objectkes which may be demanded with a varying degree of clarity, consistency and stability. Secondly, monitoring arrangements vary within the public sector and across countries not necessarily as ineffective as implied above in all cases. Thir objectives actually pursued by public corporations’ managers wil part on the existence of separate managerial markets for the private sectors. “VVe will now examine each of these points in turn. t
3.2.1. Omership structure and objectives in the public sector The weakness of the property rights approach presented above lies in the individualised concept of the nature of public ownership, diffuse the population in non-tradeable claims. In fact, not individuals but a collectivity owns the public sector, a fundamental difference from the case of the private corporation in which ownership is ‘distributive’ [see ented by the go The national collectivity is re le shareholder4 viewed in the position of a have the ability to withdraw funds individual citizens, d rtinent question therefore concerns cy decisions, and how this, government, affects the behaviour of the public sector. therefore really all about the relationship between citizens This introduces a further intermediary to t Instead of just shareholders, or the state, and m principals and a en&sbetween the voters and ma
62
S. Estrin and K Pbotin,
Does ownership always matter?
This has two main implications for our analysis. In the first place, between the public and t government ma game he maximisation of profit. other be viewed as a single unified entity. The extent to which objectives defined by the political powers are actually pursued by the firm will depend on politicians’ influence on policy implementation, a factor that varies with the constitutional system. $2.2. Qbjectives and the political process The aim of most stockholders of private sector corporations is not open to question: a maximum profit is what investors are looking for. Even though the specific steps to achieve this may be complex, particularly under uncertainty, the objective itself is simple, single and unchanging. refit maximisation is only one of a set of possible objectives defined by the political process for the public sector, however. Nationalisations, the bulk of which took piace after the Second -Worid War in both Britain and were approved by voters as ‘being in tile national interest’, even involved some relaxation of market pressus+es ther goals were also stressed at the time, including universality of service, i me redistribution, consumer representation and more ‘social’ employment policies. The correction of market failures by controlling natural monopolies and assistin lumpy investments have also been raised in the debate as well, as the use of the public sector as a tool for industrial policy, particularly to foster technological advance, and to encourage experiments with industrial ublic sector industries have also played a major role in the n of prices and incomes policies though in recent years overnments have been more careful to ensure that a positive rate of return was earned on assets. he potential multiplicity of goals emer from the political process has
S. Estrin and L! PProtin,
oes ownership abways matter?
outcome of the elections
63
be frequently
ay also be used by the incu ment to their short-term political advantage, as a source of patronage and to settle political scores. All this will generate a tendency for the government to intervene constantly and unsystematically in the management of nationalised corporations, whether or not there exists a notional ‘arm’s length’ policy [see Littlechild ( 198l)]. Frequent changes in managerial objectives create confusion may be faster than is required for the results of the correspondi become apparent - at least, managers will be able to claim so. of vague or contradictory goals, the outcome of managers’ dec unobservable. The ability of the principal to draw a contract with an a whose actions cannot be co.nstantly monitored crucially d visibility of the resulting performance. The more complex objectives, the higher the information and monitoring costs to the principal. Unobservable results greatly increase management’s informational advantage, opening opportunities for ‘hidden action’. The problem of conflicting objectives could n principle be resolve evaluating and compensating for their effects. or example, public utilities could be compensated in the short run for price restraint, either with operating subsidies or by adjusting regulatory targets accordingly. ort-term contract, which is costly, and cost this involves making a increases with complexity. precise, or frequently changing, objectives pose lrllttv cinre results truly unobservable. a more serious diKWW.,J, U...__ thpv .,a..+Jmg\tP rrr-____S to ensure that managers act in conformity with the current notio public interest, their decisions would have to be
poses further informational pro 32.3. 0hjective.e in policy implementation
onitored
closely, w
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S. Estrin and I! Ptrotin, Does ownership always matter?
less responsive to political interventions, and thus affect the implementation
of policies. Consider the case of an administrative structure which is, de facto, autonomous, making decisions on the public sector without reference to the political process. roblems associated with inconsistent or constantly changing objectives wou never arise and public sector behaviour would be determined by the interaction betwen the goals of civil servants and public managers. itish system gives the government an It has been argued that the oreover, the intervention in policy. tionally extended capacity of consensus over the constitution and the adversarial politics ination gives the system a short-term emphasis, in line with electoral politics. The stability of such a system, with actual policy-making sheltered from politics, may give it less flexibility to redefine long-term goals and to provide policy responses to long-term problems [Ashford (1981b)]. In contrast, a traditional characteristic GC the French political system would be the difficulty of making collective decisions, with coaiition governments at the head of an administation which is itself fragmented [Ashford (1982), Wright (1983), Hayward (1986)]. Thus, in spite of the greater number of political appointees, the system would leave less scope for short-term political intervention, as the policy has to inv e concentration and the active participation of the state’s ayward ! 1986)]. The French ‘institutional uncertainty’ policy partners [Ashford \ 1982j] - often putting policy-making itself at the centre of political controversy - may have in fact given more flexibilny to respond to long-term problems. 3.3. Monitoring and informationul structures in the public sector” In practice, there are a variety of public sector organisntions ranging from government departments to largely autonomous mixed economy institutions. or the purpose of this discussion, we will distin uish three levels of : direct state management, semi-autonomous public corporations endent state-controlled companies [see also Parris, Pestieau and
S. Estrin and K Ptrotin, Does ownership always matter?
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it is particularly appropriate i is vague and open to interpretation. characteristics of the product, for ex le when output is measure, or consumers (now the principals) have iittle way of determining the adequacy of the supplier’s action, like in health or education. This can be generalised to the national level, where consi t, or statutory procurement, are inv horities may also attempt to secure regularity of s integratioya [Arrow (1975)]. (ii) Public corporations: activities that require medium-term investment and flexibility of iCSpOiN2 to market, signals may not be good cases for civil servant management. This was recognised very early on in both France: what the French Left defined as ‘industrialised nation 1920 [Delion and Durupty (1982)] was made famous under the name of ‘s length’, policy adopted for the creation of ritish public corporations. e or less autonomous corporations were set up to ensure that operations that had to be run according to a productive and commercial rather than administrative cycle would enjoy suffkient independence in day-to-day management. 0th in the U.K. and in France, pubhc corporations are typically found in industrial or extractive a *ties (though in t . many have now of corporation is state-owned, and the course been privatised). majority of the board members are appointed by the government. Corporate finances are separate from the government budget, althoug may be allowed to borrow or invest on the private market. obligations restrict the options available to m therwise, corporate
countries public corporations are atta
66
S. Lstrin and VI Ptrotin, Does ownership always matter?
(~~~1()] may provide the ~e:i~\~i~l mmistry with inside information as well as expert “second opinions’ on public sector performance. Such netvvorks can be seen as non-market alternatives to internalising agency relations by means of . 11113 CtXiid be p2KtKXkX!y ergers and verticai integration [Spence ji975)j. Tt’^ useful if the corporation has monopoly power. Like private shareholders, the state can also learn from its long association with industrial operations - a repeated agency relation [Radner (1986)] - especially since it enjoys an exceptionally long tenure as owner of certain companies! certain cases, therefore, state monitoring may be at least as effective as al market monitoring, provided the objectives transmitted to the firm are clear and stable. However, if the objectives remain ‘fuzzy’, a high degree of monitoring may be required, with increased detailed instructions and close ex-ante control of nationalised firms’ activities. The less well defined the objective, the more necessary and the more attractive to the government it becomes to specify and monitor management’s actions rather than outcomes. Public corporations subject to this type of control have a much reduced autonomy. But, as we have seen, evaluating performance is impossible in situations where a priori options are unknown to the monitor, and the costs of even imperfect monitoring are likely to be prohibitive. This seems a iikely situation in nationalised industries in France and the U.K, where management’s informational adva.ntage is reinforced by more or iess o!Ecia! ru& of secrecy. Full monitoring amount to transferring responsibility onto the monitoring body, leaving in effect a large degree of discretion to the agent by not defining, and hence not limiting, the agent’s areas of discretion. Similarly, frequent redefinitions of objectives require more intervention into the day-today running of the public sector. This in turn makes management more likely to deny any responsibility for the results, while their actual behaviour further escapes observation. ossible solution to these problems is the widespread use of planning agreements or planning contracts. These are signed after egotiations ubhc sector managers and administrators, and lin corporate rants and managerial incentives to the achievement of agreed 0th parties to ency contract may the state uses its sources to assess public rformance and its s e to be observed. the ih-3 CtS carry
way to
S. Estrin and c! Photin,
Does ownership always matter?
67
restricts later corrective interventio etter the sources of information available to the sta may simply be ‘captured’ by public the case of U.S. regulatory agencies. This may happen because public managers are likely to have a fair amount of leverage in policy. corporations often are large employers, providing crucial goods or services to the nation or contributing an important part of government revenue or poiiticai credibility. In such a case, iiie phnirig contract would in effect be drawn to serve the corporation’s interest. The existence of the contract will merely act to limit the govemnent’s capacity to intervene in other areas.
(iii) Partly state-owned (or ‘mixed economy’) companies: the game is now complicated by potential conflicts between the government and private shareholders over objectives. Share-price information is available and company borrowing may not even be guaranteed by the state, as for some nationalised insurance companies in France. The state can use both private and indirect public sector sources of information. Wowever, problems may arise from contradictions between public interest goals and profit maximisation. In particular, private shareholders may be reluctant to accept policies contrary to profit-maximisation without full compensation. tianagirs wiii bc in a position to argue this, and may have other incentives to pursue a pure profit-maximising strategy. If the company has leverage and the government intends to preserve its mixed ownership character (for example, for financial reasons), these arguments may be quite powerful. Unless the public interest is defined sufficiently clearly to allow full compensation for the costs of pursuing it, the company may simply follow a private-sector strategy, regardless of the state’s objectives. In summary, when well-defined and stable objectives are given to public corporations, government monitoring of their performance could, in principle, be as effective as capital market monitoring. Indeed, un conditions (e.g., diffuse private share ownership, undeveloped st
or if the firm
S. Estrin and K Perotin, Does ownership always matter?
68
as unsatisfactory. re
stringent
incentives may also be embodied in managers’ remuneration.
government control/supervision. ut what strategy will ~z~~gement pursue? This fill in part depend on whether the managerial market is common to private and public sectors. If public corporations’ managers are unlikely to shift over to the private sector, they may react with ‘managerial slack’ - sharing the inefficiency rents with labour. This is implicitly assumed in ‘bureaucracy’ theories, which argue *maxmAn interest in the that 11avmg Ir * no filla11b1a business, public sector managers will prefkr the easy life of non-supervision [e.g., Millward and Parker (1983), Pryke (1981)]. In that case we would observe low productivity and relatively comfortable working conditions in the public sector. Such ‘managerial slack’ may also be prompted by discouragement on the part of managers who observe contradictory constraints on financing and wages, for example. Even ‘ethical’ individuals motivated, in spite of the low material incentives, by their concern for competent management may be discouraged by this. The absence of ‘networks of competence’ mentioned above may play a role here: if public sector managers perceive their civil service tutelle as hostile and/or incompetent in business matters, their to instructions is likely to be higher. In France, the grands corps h a degree of understanding between the two ight (1983)] that they have been called collusive cts of entering the private sector at some time in r them to pursue a private-type, cost-minimising, any case. For example, the French grands corps e of the same elites from the public to the private sector s means that the managerial market is to a certain extent industry and services. It also implies that the ore similar between the two sectors than
S. Estrin and K Phrotin, Does ownersh
ortunity of eventually shiftin in particular, may b true when privatisation [Peacock ( 198 inally, mixed ownership opens up ntives (e.g., with share options). encourage profit-maximisation but not interest optimisation, for which the share
the corpuration
69
is threate
sibilities for shar wever, share-bas necessarily social welfare, or public price is a poor indicator.
In this paper we have tiled to explain and illustrate the relationship between ownership arrangements and firm performance. The shareholdermanagement relationship of the firm monitored by the capital market (t private or regulated corporation) is replaced in the public sector by a cham of principals and agents where the objectives are determined politically, to be conveyed by an institutionalised policy-making structure to management. The direction in which firms’ behaviour will be affected, relative to the private sector, therefore depends on what happens at several levels. The political process will determine the clarity and consistency of the objectives defined (which are not restricted to profit-maximisation) and the budgetary attitude towards nationalised firms. The state’s capacity for intervention via the political and constitutional system determines the degree of compliance with short-term changes in objectives. The information and sanctions available to policy-makers conditions the potential effectiveness of monitoring whether goals are clea r and depends on market structure, the training of elites, presence of private shareholders, etc. Finally, the preferences of managers and the existence of a managerial market common to private and public sectors may determine the objectives that managers of public corporations will pursue when monitoring is made difficult by unclear or unstable objectives. Our analysis has implications for efficiency comparisons within the public sector and in relation to private firms. The latter will depend on the extent to
sector statutes
70
S. Estrin and k PProtin, Does ownership always matter?
hshed and widely perceived to play an important role in the economy while until recently played a more peripheral role in rench inns make greater recourse to banks and other sources of debenture finance, themselves often in state hands. ublicly-owned banks play an agency role parallcl t dustry for nationalised corptii ahIs, he enrire Frf3ich yrivhk sector rMi~ PlClWlllD cc3 L‘V ~llhli+yuvr.r sector, Arguments be subject to the same sort of interve-tie”” 0~ +hp of this sort underlie early interpretations of French indicative planning [see Schonfield (1965)]. Recent data also suggests that the French private sector is iess competitive than the British [see Jacquemin and de Jong (1977)]. On the other hand, companies at the centre of the privatisation debate in Britain have increasingly been monopolies, whereas France nationalised, and then privatised, several firms operating in fairly competitive markets. 3-rcontrast to the popular debate, our approach therefore suggests that no general unambiguous prediction can be made about the effects of privatisae can make hypotheses about specific cases by examining the nature bjectives that may be given to the organisation and its institutional structure, given the national context. Thus, for example, one would expect privatisation to improve the internai e%ciency of a corporation whose sole objective would be to maximise profit (perhaps because the initial motives for nationalisation have become obsolete) on a competitive market, if it had been the subject of repeated short-term intervention under public ownership. Conversely, where market failures are involved and private monitoring is weak, nationalisation into an autonomous corporation with a clear definition of medium-run objectives may actually improve management efficiency. The outcome is not clearcut w privatisation does not involve abandonment of all public interest goals. gulation may introduce other sources of inefficiency when the aims of government and private shareholders conflict [see Laffont and Tirole (1990)].
Alchian, B.A. and H. emsetz, 1972, Production, information ccsts and economic organization, American Economic Review 62, no. 5, 777-795. I Journal of Econo
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Bazex, M., 1984, Contrats de plan entre 1’Etat et les entreprises publiques, L’Actualitk Juridique-Droit administratif 20, Feb., 68-7 1. Beesley, M. and S. Littlechiid, 1983, Privatisation: Principles, problems and priorities, Bank Review, July. Blanc, 9. and C. BrulC, 1982, Les nationalisations franqaises en 1982, Notes et Etudes Documentaires (La Documentation francaise, Paris). Blankart, C.B., 1986, Limites de la privatisation des services publics, Recherches Economiques de Louvain 52, no. 2, June. Borcherding, T.E., W.W. Pommerehne and F. Schneider, P982, Compari the eficiency of private and public production: The evidence from five countries, Zeit rift fcr Nationaliikonomie, Suppl. 2, 127-1 S6. B6s, D., 1986, Public enterprise economics (North-Holland, Amsterdam). Caves, D.W. and L.R. Christensen, I?%$ The relative efficiency of public and private firms in a competitive environment: The case of Canadian railroads, Journal of Public Economics 88, no. 5. Cawson, A., P. Holmes and A. Stevens, 1985, The interaction between firms and the state in France, Paper given at ESRC Conference on government-industry relations in the major OECD countries, Cambridge, Dec. Cohen, E. and M. Bauer, 1985, Les grandes manoeuvres industrielles (Belfond, Paris). de Bandt, J., 1988, The process of nationalisation and privatisation in France, in: S. Estrin and C. Whitehead, eds., Privatisation and the nationalised industries, ST/ICERD Occasional paper no. 13. de Alessi, L., 1980, The economics of property rights: A review of the evidence, Research in Law and Economics 2. Delion, A.G. and M. Durupty, 1982, Les nationalisations 1982 (Econpmica, Paris). Encaoua, D. and J.J. Santini, 1989, Les privatisations en France: ElCments d’analyse et bilan, L’Actualiti Economlque 65, no. 1, March. Estrin, S. and C. Whitehead, eds., 1988, Privatisation and the nationalised industries, ST/ICERD Occasional paper no. 13. Fama, E., 1980, Agency problems and the theory of the firm, Journal of Political Economy 88, 288-307. Haut Conseil du secteur public, 1984, Rapport 1984, Vol. 2 (La Documentation FranCaise, Paris). Hayward, J., 1986, The state dnd the market economy. Industrial patriotism and economic intervention in France (Wheatsheaf Books Ltd., Brighton). Jacquemin, A. and H. de : .. ..gp 197”. European industrial organisation ( acrnillan, London). ation and competition, Kay, J.A. and Z.A. Silberston, 1984, The new industrial policy Midland Bank Review, Spring, 8-16. Kay, J.A. and D.J. Thompson, 1986, Privatisation: A policy in search of a rationale, Economic Journal 96, 18-32. ted at the Conference Lindsay, C., 1980, Is there a the economics of nonproprietory Littlechild, S.C., 1981, Ten step 11-18.
72 Peacock,
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H., 1984, Privatisation in perspective, Three Banks Review 144, Dec., 3-25. Pryke, R., 198 1, The nationalised industries. Policies and performance since 1968 ( Robertson, Oxford). rykc, R., 1982, The comparative performance of public and private enterprise, Fiscal Studies 3, no. 2, July. Wadner, R., 1986, The internal economy of large firms, Economic Journal 96, Suppl., March, l-23. Rces, R., 1984, Pilrblic enterprise economics (George Weidenfeld and Nicolson Ltd., London). Rees, R., 1985, The theory of principal and agent, parts 1 and 2, Bulletin of Economic Research 37, nos. 1 and 2, 3-25, 75-95, respectively. ees, R., 1985, Principal-agent theory and public control of product&, Mimeo. (University College, Cardiff ). Robson, W.A., 1962, Nationalized industry and public ownership, 2nd ed. (George Allen and Unwin, London). ?nrl &mocracy, Member participation in pen.
olland
4”*r L*
London School of Economics, London WC2A ZAE, V
Centre d’etude des Revenus et des Coiits, 75007Paris, France
The objective of this paper is to explain and illustrate the complex relationship between ownership arrangements and enterprise performance. It is commonly argued that efficiency will be lower in the public sector than the private because enterprise objectives deviate from maximisation of profits and because monitoring arrangements are inadequate due to the absenti of capital market discipline. We argue that public ownership does make the owner-manager relationship more complicated because the chain of principals and agems is expanded; ojectives are politically determined; and these are conveyed by a policy-making administrative structure to management. But the relative efficiency of pttblic as against private ownership actually depends on the eEp ll:cacv of capital market monitoring: on the political and constitutional svstem; on the inf~rrn9tinn L11.b L... _I.“.& &d sanctions available to policy makers; and on the nature of the management market. Variation in these factors can help to explain the different natures and roles of the public sector between countries.
This paper investigates the implications for company public ownership, in comparison with the effectiveness of th to be exercised by the capital market on private firms. our understanding of the different natures and roles sectors in different countries, especially in inspired our analysis. the last decade, changes in P ic policy in both countries.
sources of support are gratefully acknowledged.
pressures said
S. Estrin and V. Pkotin,
56
Does ownership always matter?
towards privatisation, selling about 1E29billion worth of public assets to t te sector in 1979-90. France followed in 1986-88 by privatising e firms that the considerable nationalisation programme of 19 brought into the public sector. i This policy was discontinued in 11988but nationalised conglomerates continue to enjoy substantial flexibility in the acquisition and sale of part1y-owned subsidiaries. Some of the rationales put forward in ritain for ownership changes seem to be in direct contradiction with th arguments used in France. For example, an important aim of ritish privatisations was to improve the efficiency of the firms concerned y making them subject to the disciplining pressures of the capital market. Yet French nationalisations, also meant to improve efficiency, were seen precisely as a remedy to the deficiencies of the capital market [see de Bandt (1988)]. Differences in performance have been established between nationalised and privately owned firms in various countries although not always in the same direction [see, for example, Caves and Christiansen (i980), Pryke ( i982), Borcherding et al. (1982) and Bees (1984)], and performance changes associated with privatisation or nationalisation have been observed within particular firms in Britain and France. However, Molyneux and Thompson (1987) suggest that performance improved befire privatisation in several British cases. Nationalisation has been associated with performance improvement in France overall but no deterioration appeared after privatisation, which seems to have had a neutral or perhaps positive effect on most of the companies concerned [Encaoua and Santini ( 1989)J Efficiency differences between public and private firms have traditionally been attributed to differences in objectives and in the nature of markets upon which the :*vo types of firm trade. The tendency for public sector production to be clustered in markets with monopolistic or severely imperfect industrial structures has led to the suggestion that privatisation is necessary to introduce a measure of competition and market discipline into public sector * ies [see Littlechild (1978), Beesley and Littlechild j1983)]. x of nationalised firms operate in competition with the pr over group before privatisation in Britain; ETF Acquitaine ante). Furthermore, as Vickers and Yarrow (1985, 1988) stress, problems of misallocation deriving from market structure are logically distinct from the question of ownership form and can principle be dealt with by regulation rather than ownership form [see also acock ( 1984), Kay and erston ( 1984)].2 ‘This had raised the state’s share in the production of national output from around 11% to 16%.
ritain the debate shifted away from
S. Estrin and V. Pirotin, Does ownership always matter?
57
The presence of mo nopolies in the public sector is related to t for nationalisatio ifferent objectives. and ‘under-investment’. arket failures, including natural monopolies, licy-makers have broadened the category to include the supply of products in ‘the nation interest’ such as arms manufacture, transport systems and infrastructure. istributional and equity goals have also been invoked [see ryke (1981), Rees (1984), If public and private sector firms were only distinguished by differences in objectives, it would Mow that a public corporation, given the objective of profit-maximisation, would perform as well as a capitalist firm, holding market structure constant. This would render privatisation unnecessary. Yet privatisers have grandiose claims. Privatisation, it is suggested, will reduce bureaucracy, waste and inefficiency. The argument is based on differences in the internal structure and incentives within the firm associated with ownership form. Public ownership is said to remove capital market incentives to monitor managers’ performance, allowing them to lead a ‘comfortable life’ [Pryke (1981)] at the expense of public resources [see, e.g. de Alessi (1980)]. This paper focuses on internal arrangements and the implications of the weakening of capital market pressures on the public sector. However, we will argue that the world is rather more complicated and that there are variations in the effectiveness of capital market monitoring as well as in institutional arrangements within the public sector and across countries. A now familiar approach to questions of internal organisation is that of principal-and-agent models. This emphasises the role of institutional arrangements in overcoming problems of information costs and risk sharing in situations where somebody acts on somebody else’s behalf for a remuneration [see Rees (1985b), Arrow (1986)]. ‘*hen o-wnership and management are separate, their particular institutional relationship -~-ill contribute to determine the firm’s actual behaviour, and the extent to which it deviates from its owners’ objectives. This suggests that different regimes of ownership, involving different agents, informational structures and incentives, may result in different behaviour regardless of the owners’ objectives. In the following s mechanisms of capital and managerial market
58
S. Estrin and V: Pbotin,
Does ownership always matter?
and management do not coincide, as occurs i orporations, owners ‘commission’ management to act in ems may arise because managers have interests that f owners, and owners do not have complete information. order to generate a coincidence of interests, owners (the ‘principal’) will esign a contract incorporating in managers’ remuneration a set of rewards and penalties associated with optimal and suboptimal behaviour. Since the agreement is drawn up before the outcome is known, and the income to be shared is not exclusively dependent on management’s behaviour, the contract may provide for some risk-sharing. Owners’ ability to enforce behaviour consistent with their objectives depends on the information they can obtain, directly or indirectly, about the optimality of managers’ actions. henever management has an informational advantage, owners have to protect themselves against the risks of ‘hidden action’, see Arrow (1986) or adverse selection by managers. As information becomes costlier, more incentives will have to be incorporated into contracts, for instance by increasing the risk to management Grough higher penalties and rewards [Rees (1985a), Shave11 4 1979)]. In the private profit-rraaximising corporation, the informational and incentives structures are usually described as follows. Managers, who are paid to maximise profit for owners, are assumed to pursue prestige and power as well as monetary objectives. They will try to increase their benefits and to promote company growth at the expense of profit [Williamson (1963, 1980)]. s bear most of the risk, but cannot observe managers’ actions ey are kept informed of the company’s pe rmance by regularly ccounts and through the share price illward and Parker he company can also be compared with others in the same sector the impact of external events on its performance. ever-31types of sanctions and z-n-+;~~pc Ill~~rrr~. vu are used to induce managers to refit. The market for shares gives o*wncrs a since they can withdraw their assets by selling stock.
S. Estrin and K Ptrotin, Does ownership dways matter?
and use information are particularly public sector. The first is 5vhe number of small stockholders.
relevant
for a
f33mm?p&iiSQn
59
with
the
numerous small shareholders are often seen as a pr group utility function [Rees (f98!5a)], but this ignores the economies of scale present in matters of information and decision&raking when information is costly. As remarked by aterson (f985), it may be too costly shareholder to
3.1. A conventionalview
In fitting the public sector organisation to this setup, the first problem is of private shareholder to identify the owners. view [see Alchian and
60
S. Estrin and K Phrotin, Does ownership always matter.?
to compensate, Nationalised firms are in fact usually monitored by civil servants who are not necessarily the best people to evaluate car Furthermore, the share price represents a conflagration of different expectations, Different agents with diverse attitudes towards current performance and future prospects buy and sell shares according to the divergence between their expectations and the current market price. As long as these expectations are formed independently, the ruling share price therefore emerges via a pooling of information, and represents a more thorough and diffuse monitoring than could be undertaken by a single agency. Thus, however efficient the state’s monitoring activities, they seem likely to be inferior to the private market. The absence of a market for shares similarly removes sanctions for bad performance and incentives to managers in the public sector. Civil servants, who are not entitled to any of the financial gains due to improved efficiency, -willhave no incentive to monitor public firms. Members of the public do not have the possibility of shifting their assets away from unprofitable ventures, lowering share prices and informing potential bidders that the companies’ assets are not earning the maximum possible return. The absence of shareholders’ rebellions or takeovers removes a crucial check on public sector performance, leaving management far more discretion than in the case private ownership [see Lindsay (198G), Kay and Silberston (1984), illward and Parker (1983)]. Public corporations are sometimes even thought to have a ‘soft budget constraint’ [Kornai (198G)] with virtually unlimited access to government funds, so the company runs no risk of bankruptcy, no matter how inefficient its management.’ The absence of tradeable shares also rules out incentive schemes tying management remuneration in part to the performance of the firm via the share price, for le through share option plans. One must presume that all this can lead lack in nationalised corporations [de Alessi (198G)]. trade unions appropriate
S. Estrin and K PProtin, Dotis ownershi;
always matter?
61
3.2. An alternative framework
is our contention that
this conventional approach, t insightful, cannot successfully explain inter-country variations in the sc=qe and efkiency of the public sect because it over-simplifies the issues to the advantage of the private sector. e therefore intend to extend the framework in two directions. irst, by analysing the complex chain of relations the voting publi to company managers via the state a replaces tradeable shares for public corporations. This und gence of an assortment of public sector objectkes which may be demanded with a varying degree of clarity, consistency and stability. Secondly, monitoring arrangements vary within the public sector and across countries not necessarily as ineffective as implied above in all cases. Thir objectives actually pursued by public corporations’ managers wil part on the existence of separate managerial markets for the private sectors. “VVe will now examine each of these points in turn. t
3.2.1. Omership structure and objectives in the public sector The weakness of the property rights approach presented above lies in the individualised concept of the nature of public ownership, diffuse the population in non-tradeable claims. In fact, not individuals but a collectivity owns the public sector, a fundamental difference from the case of the private corporation in which ownership is ‘distributive’ [see ented by the go The national collectivity is re le shareholder4 viewed in the position of a have the ability to withdraw funds individual citizens, d rtinent question therefore concerns cy decisions, and how this, government, affects the behaviour of the public sector. therefore really all about the relationship between citizens This introduces a further intermediary to t Instead of just shareholders, or the state, and m principals and a en&sbetween the voters and ma
62
S. Estrin and K Pbotin,
Does ownership always matter?
This has two main implications for our analysis. In the first place, between the public and t government ma game he maximisation of profit. other be viewed as a single unified entity. The extent to which objectives defined by the political powers are actually pursued by the firm will depend on politicians’ influence on policy implementation, a factor that varies with the constitutional system. $2.2. Qbjectives and the political process The aim of most stockholders of private sector corporations is not open to question: a maximum profit is what investors are looking for. Even though the specific steps to achieve this may be complex, particularly under uncertainty, the objective itself is simple, single and unchanging. refit maximisation is only one of a set of possible objectives defined by the political process for the public sector, however. Nationalisations, the bulk of which took piace after the Second -Worid War in both Britain and were approved by voters as ‘being in tile national interest’, even involved some relaxation of market pressus+es ther goals were also stressed at the time, including universality of service, i me redistribution, consumer representation and more ‘social’ employment policies. The correction of market failures by controlling natural monopolies and assistin lumpy investments have also been raised in the debate as well, as the use of the public sector as a tool for industrial policy, particularly to foster technological advance, and to encourage experiments with industrial ublic sector industries have also played a major role in the n of prices and incomes policies though in recent years overnments have been more careful to ensure that a positive rate of return was earned on assets. he potential multiplicity of goals emer from the political process has
S. Estrin and L! PProtin,
oes ownership abways matter?
outcome of the elections
63
be frequently
ay also be used by the incu ment to their short-term political advantage, as a source of patronage and to settle political scores. All this will generate a tendency for the government to intervene constantly and unsystematically in the management of nationalised corporations, whether or not there exists a notional ‘arm’s length’ policy [see Littlechild ( 198l)]. Frequent changes in managerial objectives create confusion may be faster than is required for the results of the correspondi become apparent - at least, managers will be able to claim so. of vague or contradictory goals, the outcome of managers’ dec unobservable. The ability of the principal to draw a contract with an a whose actions cannot be co.nstantly monitored crucially d visibility of the resulting performance. The more complex objectives, the higher the information and monitoring costs to the principal. Unobservable results greatly increase management’s informational advantage, opening opportunities for ‘hidden action’. The problem of conflicting objectives could n principle be resolve evaluating and compensating for their effects. or example, public utilities could be compensated in the short run for price restraint, either with operating subsidies or by adjusting regulatory targets accordingly. ort-term contract, which is costly, and cost this involves making a increases with complexity. precise, or frequently changing, objectives pose lrllttv cinre results truly unobservable. a more serious diKWW.,J, U...__ thpv .,a..+Jmg\tP rrr-____S to ensure that managers act in conformity with the current notio public interest, their decisions would have to be
poses further informational pro 32.3. 0hjective.e in policy implementation
onitored
closely, w
64
S. Estrin and I! Ptrotin, Does ownership always matter?
less responsive to political interventions, and thus affect the implementation
of policies. Consider the case of an administrative structure which is, de facto, autonomous, making decisions on the public sector without reference to the political process. roblems associated with inconsistent or constantly changing objectives wou never arise and public sector behaviour would be determined by the interaction betwen the goals of civil servants and public managers. itish system gives the government an It has been argued that the oreover, the intervention in policy. tionally extended capacity of consensus over the constitution and the adversarial politics ination gives the system a short-term emphasis, in line with electoral politics. The stability of such a system, with actual policy-making sheltered from politics, may give it less flexibility to redefine long-term goals and to provide policy responses to long-term problems [Ashford (1981b)]. In contrast, a traditional characteristic GC the French political system would be the difficulty of making collective decisions, with coaiition governments at the head of an administation which is itself fragmented [Ashford (1982), Wright (1983), Hayward (1986)]. Thus, in spite of the greater number of political appointees, the system would leave less scope for short-term political intervention, as the policy has to inv e concentration and the active participation of the state’s ayward ! 1986)]. The French ‘institutional uncertainty’ policy partners [Ashford \ 1982j] - often putting policy-making itself at the centre of political controversy - may have in fact given more flexibilny to respond to long-term problems. 3.3. Monitoring and informationul structures in the public sector” In practice, there are a variety of public sector organisntions ranging from government departments to largely autonomous mixed economy institutions. or the purpose of this discussion, we will distin uish three levels of : direct state management, semi-autonomous public corporations endent state-controlled companies [see also Parris, Pestieau and
S. Estrin and K Ptrotin, Does ownership always matter?
65
it is particularly appropriate i is vague and open to interpretation. characteristics of the product, for ex le when output is measure, or consumers (now the principals) have iittle way of determining the adequacy of the supplier’s action, like in health or education. This can be generalised to the national level, where consi t, or statutory procurement, are inv horities may also attempt to secure regularity of s integratioya [Arrow (1975)]. (ii) Public corporations: activities that require medium-term investment and flexibility of iCSpOiN2 to market, signals may not be good cases for civil servant management. This was recognised very early on in both France: what the French Left defined as ‘industrialised nation 1920 [Delion and Durupty (1982)] was made famous under the name of ‘s length’, policy adopted for the creation of ritish public corporations. e or less autonomous corporations were set up to ensure that operations that had to be run according to a productive and commercial rather than administrative cycle would enjoy suffkient independence in day-to-day management. 0th in the U.K. and in France, pubhc corporations are typically found in industrial or extractive a *ties (though in t . many have now of corporation is state-owned, and the course been privatised). majority of the board members are appointed by the government. Corporate finances are separate from the government budget, althoug may be allowed to borrow or invest on the private market. obligations restrict the options available to m therwise, corporate
countries public corporations are atta
66
S. Lstrin and VI Ptrotin, Does ownership always matter?
(~~~1()] may provide the ~e:i~\~i~l mmistry with inside information as well as expert “second opinions’ on public sector performance. Such netvvorks can be seen as non-market alternatives to internalising agency relations by means of . 11113 CtXiid be p2KtKXkX!y ergers and verticai integration [Spence ji975)j. Tt’^ useful if the corporation has monopoly power. Like private shareholders, the state can also learn from its long association with industrial operations - a repeated agency relation [Radner (1986)] - especially since it enjoys an exceptionally long tenure as owner of certain companies! certain cases, therefore, state monitoring may be at least as effective as al market monitoring, provided the objectives transmitted to the firm are clear and stable. However, if the objectives remain ‘fuzzy’, a high degree of monitoring may be required, with increased detailed instructions and close ex-ante control of nationalised firms’ activities. The less well defined the objective, the more necessary and the more attractive to the government it becomes to specify and monitor management’s actions rather than outcomes. Public corporations subject to this type of control have a much reduced autonomy. But, as we have seen, evaluating performance is impossible in situations where a priori options are unknown to the monitor, and the costs of even imperfect monitoring are likely to be prohibitive. This seems a iikely situation in nationalised industries in France and the U.K, where management’s informational adva.ntage is reinforced by more or iess o!Ecia! ru& of secrecy. Full monitoring amount to transferring responsibility onto the monitoring body, leaving in effect a large degree of discretion to the agent by not defining, and hence not limiting, the agent’s areas of discretion. Similarly, frequent redefinitions of objectives require more intervention into the day-today running of the public sector. This in turn makes management more likely to deny any responsibility for the results, while their actual behaviour further escapes observation. ossible solution to these problems is the widespread use of planning agreements or planning contracts. These are signed after egotiations ubhc sector managers and administrators, and lin corporate rants and managerial incentives to the achievement of agreed 0th parties to ency contract may the state uses its sources to assess public rformance and its s e to be observed. the ih-3 CtS carry
way to
S. Estrin and c! Photin,
Does ownership always matter?
67
restricts later corrective interventio etter the sources of information available to the sta may simply be ‘captured’ by public the case of U.S. regulatory agencies. This may happen because public managers are likely to have a fair amount of leverage in policy. corporations often are large employers, providing crucial goods or services to the nation or contributing an important part of government revenue or poiiticai credibility. In such a case, iiie phnirig contract would in effect be drawn to serve the corporation’s interest. The existence of the contract will merely act to limit the govemnent’s capacity to intervene in other areas.
(iii) Partly state-owned (or ‘mixed economy’) companies: the game is now complicated by potential conflicts between the government and private shareholders over objectives. Share-price information is available and company borrowing may not even be guaranteed by the state, as for some nationalised insurance companies in France. The state can use both private and indirect public sector sources of information. Wowever, problems may arise from contradictions between public interest goals and profit maximisation. In particular, private shareholders may be reluctant to accept policies contrary to profit-maximisation without full compensation. tianagirs wiii bc in a position to argue this, and may have other incentives to pursue a pure profit-maximising strategy. If the company has leverage and the government intends to preserve its mixed ownership character (for example, for financial reasons), these arguments may be quite powerful. Unless the public interest is defined sufficiently clearly to allow full compensation for the costs of pursuing it, the company may simply follow a private-sector strategy, regardless of the state’s objectives. In summary, when well-defined and stable objectives are given to public corporations, government monitoring of their performance could, in principle, be as effective as capital market monitoring. Indeed, un conditions (e.g., diffuse private share ownership, undeveloped st
or if the firm
S. Estrin and K Perotin, Does ownership always matter?
68
as unsatisfactory. re
stringent
incentives may also be embodied in managers’ remuneration.
government control/supervision. ut what strategy will ~z~~gement pursue? This fill in part depend on whether the managerial market is common to private and public sectors. If public corporations’ managers are unlikely to shift over to the private sector, they may react with ‘managerial slack’ - sharing the inefficiency rents with labour. This is implicitly assumed in ‘bureaucracy’ theories, which argue *maxmAn interest in the that 11avmg Ir * no filla11b1a business, public sector managers will prefkr the easy life of non-supervision [e.g., Millward and Parker (1983), Pryke (1981)]. In that case we would observe low productivity and relatively comfortable working conditions in the public sector. Such ‘managerial slack’ may also be prompted by discouragement on the part of managers who observe contradictory constraints on financing and wages, for example. Even ‘ethical’ individuals motivated, in spite of the low material incentives, by their concern for competent management may be discouraged by this. The absence of ‘networks of competence’ mentioned above may play a role here: if public sector managers perceive their civil service tutelle as hostile and/or incompetent in business matters, their to instructions is likely to be higher. In France, the grands corps h a degree of understanding between the two ight (1983)] that they have been called collusive cts of entering the private sector at some time in r them to pursue a private-type, cost-minimising, any case. For example, the French grands corps e of the same elites from the public to the private sector s means that the managerial market is to a certain extent industry and services. It also implies that the ore similar between the two sectors than
S. Estrin and K Phrotin, Does ownersh
ortunity of eventually shiftin in particular, may b true when privatisation [Peacock ( 198 inally, mixed ownership opens up ntives (e.g., with share options). encourage profit-maximisation but not interest optimisation, for which the share
the corpuration
69
is threate
sibilities for shar wever, share-bas necessarily social welfare, or public price is a poor indicator.
In this paper we have tiled to explain and illustrate the relationship between ownership arrangements and firm performance. The shareholdermanagement relationship of the firm monitored by the capital market (t private or regulated corporation) is replaced in the public sector by a cham of principals and agents where the objectives are determined politically, to be conveyed by an institutionalised policy-making structure to management. The direction in which firms’ behaviour will be affected, relative to the private sector, therefore depends on what happens at several levels. The political process will determine the clarity and consistency of the objectives defined (which are not restricted to profit-maximisation) and the budgetary attitude towards nationalised firms. The state’s capacity for intervention via the political and constitutional system determines the degree of compliance with short-term changes in objectives. The information and sanctions available to policy-makers conditions the potential effectiveness of monitoring whether goals are clea r and depends on market structure, the training of elites, presence of private shareholders, etc. Finally, the preferences of managers and the existence of a managerial market common to private and public sectors may determine the objectives that managers of public corporations will pursue when monitoring is made difficult by unclear or unstable objectives. Our analysis has implications for efficiency comparisons within the public sector and in relation to private firms. The latter will depend on the extent to
sector statutes
70
S. Estrin and k PProtin, Does ownership always matter?
hshed and widely perceived to play an important role in the economy while until recently played a more peripheral role in rench inns make greater recourse to banks and other sources of debenture finance, themselves often in state hands. ublicly-owned banks play an agency role parallcl t dustry for nationalised corptii ahIs, he enrire Frf3ich yrivhk sector rMi~ PlClWlllD cc3 L‘V ~llhli+yuvr.r sector, Arguments be subject to the same sort of interve-tie”” 0~ +hp of this sort underlie early interpretations of French indicative planning [see Schonfield (1965)]. Recent data also suggests that the French private sector is iess competitive than the British [see Jacquemin and de Jong (1977)]. On the other hand, companies at the centre of the privatisation debate in Britain have increasingly been monopolies, whereas France nationalised, and then privatised, several firms operating in fairly competitive markets. 3-rcontrast to the popular debate, our approach therefore suggests that no general unambiguous prediction can be made about the effects of privatisae can make hypotheses about specific cases by examining the nature bjectives that may be given to the organisation and its institutional structure, given the national context. Thus, for example, one would expect privatisation to improve the internai e%ciency of a corporation whose sole objective would be to maximise profit (perhaps because the initial motives for nationalisation have become obsolete) on a competitive market, if it had been the subject of repeated short-term intervention under public ownership. Conversely, where market failures are involved and private monitoring is weak, nationalisation into an autonomous corporation with a clear definition of medium-run objectives may actually improve management efficiency. The outcome is not clearcut w privatisation does not involve abandonment of all public interest goals. gulation may introduce other sources of inefficiency when the aims of government and private shareholders conflict [see Laffont and Tirole (1990)].
Alchian, B.A. and H. emsetz, 1972, Production, information ccsts and economic organization, American Economic Review 62, no. 5, 777-795. I Journal of Econo
S. Estrin and k: Phtin,
Does ownership always matter?
71
Bazex, M., 1984, Contrats de plan entre 1’Etat et les entreprises publiques, L’Actualitk Juridique-Droit administratif 20, Feb., 68-7 1. Beesley, M. and S. Littlechiid, 1983, Privatisation: Principles, problems and priorities, Bank Review, July. Blanc, 9. and C. BrulC, 1982, Les nationalisations franqaises en 1982, Notes et Etudes Documentaires (La Documentation francaise, Paris). Blankart, C.B., 1986, Limites de la privatisation des services publics, Recherches Economiques de Louvain 52, no. 2, June. Borcherding, T.E., W.W. Pommerehne and F. Schneider, P982, Compari the eficiency of private and public production: The evidence from five countries, Zeit rift fcr Nationaliikonomie, Suppl. 2, 127-1 S6. B6s, D., 1986, Public enterprise economics (North-Holland, Amsterdam). Caves, D.W. and L.R. Christensen, I?%$ The relative efficiency of public and private firms in a competitive environment: The case of Canadian railroads, Journal of Public Economics 88, no. 5. Cawson, A., P. Holmes and A. Stevens, 1985, The interaction between firms and the state in France, Paper given at ESRC Conference on government-industry relations in the major OECD countries, Cambridge, Dec. Cohen, E. and M. Bauer, 1985, Les grandes manoeuvres industrielles (Belfond, Paris). de Bandt, J., 1988, The process of nationalisation and privatisation in France, in: S. Estrin and C. Whitehead, eds., Privatisation and the nationalised industries, ST/ICERD Occasional paper no. 13. de Alessi, L., 1980, The economics of property rights: A review of the evidence, Research in Law and Economics 2. Delion, A.G. and M. Durupty, 1982, Les nationalisations 1982 (Econpmica, Paris). Encaoua, D. and J.J. Santini, 1989, Les privatisations en France: ElCments d’analyse et bilan, L’Actualiti Economlque 65, no. 1, March. Estrin, S. and C. Whitehead, eds., 1988, Privatisation and the nationalised industries, ST/ICERD Occasional paper no. 13. Fama, E., 1980, Agency problems and the theory of the firm, Journal of Political Economy 88, 288-307. Haut Conseil du secteur public, 1984, Rapport 1984, Vol. 2 (La Documentation FranCaise, Paris). Hayward, J., 1986, The state dnd the market economy. Industrial patriotism and economic intervention in France (Wheatsheaf Books Ltd., Brighton). Jacquemin, A. and H. de : .. ..gp 197”. European industrial organisation ( acrnillan, London). ation and competition, Kay, J.A. and Z.A. Silberston, 1984, The new industrial policy Midland Bank Review, Spring, 8-16. Kay, J.A. and D.J. Thompson, 1986, Privatisation: A policy in search of a rationale, Economic Journal 96, 18-32. ted at the Conference Lindsay, C., 1980, Is there a the economics of nonproprietory Littlechild, S.C., 1981, Ten step 11-18.
72 Peacock,
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H., 1984, Privatisation in perspective, Three Banks Review 144, Dec., 3-25. Pryke, R., 198 1, The nationalised industries. Policies and performance since 1968 ( Robertson, Oxford). rykc, R., 1982, The comparative performance of public and private enterprise, Fiscal Studies 3, no. 2, July. Wadner, R., 1986, The internal economy of large firms, Economic Journal 96, Suppl., March, l-23. Rces, R., 1984, Pilrblic enterprise economics (George Weidenfeld and Nicolson Ltd., London). Rees, R., 1985, The theory of principal and agent, parts 1 and 2, Bulletin of Economic Research 37, nos. 1 and 2, 3-25, 75-95, respectively. ees, R., 1985, Principal-agent theory and public control of product&, Mimeo. (University College, Cardiff ). Robson, W.A., 1962, Nationalized industry and public ownership, 2nd ed. (George Allen and Unwin, London). ?nrl &mocracy, Member participation in pen.