Pandemic Crisis, Power and the Role of the State

ABSTRACT

We build on the experience of the COVID-19 crisis to investigate how a State owned and a private company, such as the national health system, are managed when a crisis may occur. We develop our analysis considering an incomplete contract model. We concentrate our attention on the incentives for economic agents assuming that the State expropriates property rights in the crisis event. The choice between public and private health system depends on three key elements: expropriation degree of the State/power of the private sector, damage of cost reduction innovations, probability of a crisis event. If the probability of the crisis is high, the damage is significant and the contracting power of the manager is strong then public ownership may be optimal because cost innovations are more aligned to the first best solution than in case of a private ownership.

KEYWORDS:

• Incomplete contracts
• public ownership
• catastrophic event
• pandemic
• privatization

Acknowledgments

We thank Michele Grillo, Elisabetta Iossa, Annalisa Luporini and seminar participants at Univeristà di Firenze and Università Cattolica del Sacro Cuore di Milano for useful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Following Hoppe and Schmitz (2010) an example of functions that satisfy these assumptions is $\mathit{c}\left(\mathit{e}\right)=2\sqrt{\mathit{e}}-\mathit{e},\mathit{t}\left(\mathit{e}\right)=\sqrt{\mathit{e}}-\frac{e}{2}$, where $\bar{e}=1$.