What Determines the Extent of Public Ownership

Hadi Esfahani () and Ali Ardakani
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Hadi Esfahani: Department of Economics, University of Illinois at Urbana-Champaign

No 205, Working Papers from Economic Research Forum

Abstract: There is a great deal of variation in the extent of state ownership of enterprises across countries and despite the growing consensus over the benefits of privatization many countries continue to maintain large public sectors. Currently, there are two prominent theories that purport to explain the extent of public ownership. One perspective emphasizes the role of state ownership as a means of resolving contracting problems when the government wants to get the firms to perform certain tasks. The other points to public enterprises as a substitute for private ones that are driven out when the risk of opportunistic changes in regulatory and tax policies is high. This paper develops a model that puts these two theories into a common framework and identifies the conditions under which the effects of each dominate. The results show that deficiencies in commitment and greater political pressure for control of employment are associated with larger public enterprise sectors. We also find that a higher opportunity cost of public funds tends to reduce the extent of state ownership except when commitment capability and pressure for employment control are low. These findings have interesting implications for the pattern of state ownership across countries and for the timing of nationalizations and privatizations.

Pages: 18 pages
Date: 2002-02-07, Revised 2002-02-07
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Published by The Economic Research Forum (ERF)

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