Aidan R. Vining

Ownership versus competition: Efficiency in public enterprise*

ConclusionCertainly the introduction of product market competition into potentially competitive or, at least contestable, markets can improve performance. To take just one example, Morrison and Whinston (1986, 1986) estimate that even in the imperfectly contestable U.S. airline industry, the annual U.S. welfare gains from deregulation have been around

Public–private partnerships in the US and Canada: “There are no free lunches”1

6 billion.But this paper argues, and further buttresses empirically, that ownership also matters and matters a lot. This does not necessarily imply that private ownership is always preferable to public ownership. PCs also engage in rent-seeking where possible, but they will try to maximize realizable rents by (relatively) keeping down production costs. Of course, where there are massive economies of scale and scope, high entry barriers, or externalities, public ownership may be preferred. (see Vickers and Yarrow, 1988).A non-trivial (although as this article has demonstrated, not an obvious) conclusion is that where competition is normatively appropriate, private ownership is preferable from an efficiency perspective. Given that major product markets have continued to become more concentrated in most countries (see, for example, Hart and Clarke, 1980), the relative importance of contestable ownership in inducing technical (if not allocative) efficiency is likely to increase.

Government Supply and Government Production Failure: A Framework Based on Contestability

Abstract Governments in many industrialized nations have made concerted efforts to reduce their immediate expenditures and to reduce the cost of major infrastructure projects. Public–private partnerships (P3s) are one emerging method that might do so. Despite the increased use of P3s, there is little independent research on the effectiveness of P3s as a public policy instrument. This article considers the major rationales for P3s, including cost savings and keeping project financing off government budgets. It then presents a transaction cost model that suggests that P3s can often be prone to conflict, high contracting costs, opportunism and failure. Evidence from six major infrastructure projects and a summary analysis of US prisons is then presented. These cases confirm that contracting costs have been high, as predicted by the model. Specifically, high contracting costs reflect the presence of complexity/uncertainty, asset specificity, the potential for ex post bilateral opportunism and a lack of contract management skills by governments. Given these circumstances, the private sector can behave opportunistically at the expense of the public sector as there has sometimes been a political imperative to prevent projects from terminating. Public partners have also behaved opportunistically after projects are in place. Unless public sector managers recognize that they must design contracts that both compensate private sector partners for risk and then ensure that they actually bear it, P3s have little chance of being efficient or effective service delivery mechanisms.

The Political Economy of Public‐Private Partnerships and Analysis of Their Social Value

A complete conceptual framework for policy analysis requires a theory of government supply and government production failure to complement the well-developed theory of market failure provided by welfare economics. Charles Wolf has made an important start by attempting to draw parallels between market failures and the manifestations of government supply failures. This article provides a more useful analytical framework for government supply failure in two important ways. First, it draws on several perspectives from the economics of organization to sketch both normative and positive theories of government supply. Second, it uses the positive theory of government supply behavior to make direct comparisons with the traditional market failures. It concludes with some implications of the framework for assessing the potential gains from privatization.

Proposal for a Future Delivery Market for Transplant Organs

This article applies political economy theory to public‐private partnerships (PPPs). First, we propose that social welfare is the appropriate normative evaluation criterion to evaluate the social value of PPPs. Second, we specify the goals of PPP participants, including private‐sector partners and governments. Third, we review the observed outcomes of PPPs and analyze them from both a political economy perspective and a social welfare perspective. Fourth, based on a comparison of the actual outcomes of PPPs to normatively desirable social welfare outcomes, we propose some ‘rules for governments’ concerning the design of government PPP institutions and the management of PPPs. We argue that if governments were to adopt these rules there would be fewer PPPs in total, they would be more like traditional government contracts and there would be a greater likelihood of improved social welfare. However, political economy theory also explains why implementation of any reform will be difficult.

The role of agency costs in explaining the superior performance of foreign MNE subsidiaries

Improvements in surgical procedures and immunosuppressive practices have greatly increased the range and success rate of organ transplants. Unfortunately, supply does not meet demand, and demand is increasing. This paper documents the current level of unsatisfied demand for several transplantable organs, and argues that the extant system of altruistic organ donation is unlikely ever to provide adequate supply because of lack of incentives to donate and the ambiguity surrounding property rights over transplantable organs. A greater reliance on markets would help attenuate these problems. However, unorganized private spot markets for human organs are likely to be both inefficient and inequitable, and are perceived as morally offensive. A feasible alternative is an organized, publicly operated future delivery market, wherein an individual can contract, for valuable consideration, with a government agency for delivery of a specific organ upon death. The implementation of such a market would encounter difficult (but not intractable) problems such as price determination, the selection of a medium of exchange, and contractual issues, particularly the role of minors in such a system. Finally, it is argued that such a market is superior to the much-discussed compulsory expropriation alternative.

An Assessment of Important Issues Concerning the Application of Benefit-Cost Analysis to Social Policy

Many studies find that foreign subsidiaries of multi-national enterprises are more profitable or more productive than firms that operate exclusively in a single domestic market or that produce in and export from a single domestic market. These differences are usually attributed to firm-specific assets. This article explores an additional explanation for the observed profitability differences: agency costs. Specifically, we suggest that MNE subsidiaries perform better than domestic corporations in part because of lower agency costs due to more concentrated ownership. We find support for this hypothesis using data on Canadian companies for the years 1986 and 1991. Key results: The performance advantage of foreign subsidiaries attributable to firm-specific advantages is reduced when one controls for differences in agency costs due to ownership concentration differences between these subsidiaries and domestic firms.

Cost–benefit analysis involving addictive goods: contingent valuation to estimate willingness‐to‐pay for smoking cessation

Benefit-cost analysis (BCA) provides a framework for systematically assessing the efficiency of public policies. Increasingly, BCA is being applied to social policies, ranging from preschool interventions to prison reentry programs. These applications offer great potential for helping to identify policies that offer the best returns on public investments aimed at helping the disadvantaged or otherwise improving social life. However, applying BCA to social policies pose a number of challenges. The need for a comprehensive approach to assessing social policies generally requires making predictions based on data from multiple sources and using available shadow prices. As these predictions and shadow prices are inherently uncertain, special effort must be made to explicitly address the resulting uncertainty of predictions of net benefits. Prediction and valuation are complicated by behaviors, such as addiction, that do not clearly satisfy the assumptions of neoclassical welfare economics. As distributional goals are often an explicit motivation for social policies, BCA may be an incomplete framework for public policy purposes unless analysts can find ways to incorporate peoples willingness to pay for changes in the distribution of consumption across society. If BCA is to reach its potential for contributing to good social policy, analysts must be aware of these challenges and researchers must help address them.

More appropriate discounting: the rate of social time preference and the value of the social discount rate

The valuation of changes in consumption of addictive goods resulting from policy interventions presents a challenge for cost-benefit analysts. Consumer surplus losses from reduced consumption of addictive goods that are measured relative to market demand schedules overestimate the social cost of cessation interventions. This article seeks to show that consumer surplus losses measured using a non-addicted demand schedule provide a better assessment of social cost. Specifically, (1) it develops an addiction model that permits an estimate of the smokers compensating variation for the elimination of addiction; (2) it employs a contingent valuation survey of current smokers to estimate their willingness-to-pay (WTP) for a treatment that would eliminate addiction; (3) it uses the estimate of WTP from the survey to calculate the fraction of consumer surplus that should be viewed as consumer value; and (4) it provides an estimate of this fraction. The exercise suggests that, as a tentative first and rough rule-of-thumb, only about 75% of the loss of the conventionally measured consumer surplus should be counted as social cost for policies that reduce the consumption of cigarettes. Additional research to estimate this important rule-of-thumb is desirable to address the various caveats relevant to this study.

Understanding the failure of internal knowledge markets: A framework for diagnosis and improvement

Abstract Recently, a number of authors, including Burgess and Zerbe, have recommended the use of a real social discount rate (SDR) in the range of 6–8% in benefit-cost analysis (BCA) of public projects. They derive this rate based on the social opportunity cost of capital (SOC) method. In contrast, this article argues that the correct method is to discount future impacts based on the rate of social time preference (STP). Flows in or out of private investment should be multiplied by the shadow price of capital (SPC). Using this method and employing recent United States data, we obtain an estimate of the rate of STP of 3.5% and an SPC of 2.2. We also re-estimate the SDR using the SOC method and conclude that, even if analysts continue to use this method, they should use a considerably lower rate of about 5%.