Public enterprises, planning and policy adoption: three welfare propositions

Abstract

Despite widespread privatizations over the last three decades, public enterprises, as production units under government control, are still present in several countries and sectors. While the academic and political debate on the costs and benefits of privatization is vast, a focus on the rationale for public enterprises, from the standpoint of Social Cost Benefit Analysis, is missing. This paper aims at filling this gap and provides a normative discussion on public enterprises in a general equilibrium setting. The conditions under which public provision may be beneficial and the metrics for evaluating polices and projects under (a)symmetric information and (non)benevolent governments are presented in three welfare propositions. The main policy message points to the overall quality of institutions as a necessary pre-condition for socially desirable public enterprises. A sound institutional environment provides policy-makers with the correct incentives to design and implement meaningful policies even if public administrators adopt sub-optimal plans. Institutions should constrain self-interested policy-makers from disrupting the key welfare signals for policy adoption as well as for project appraisal, while bias in management is a relatively less important concern.

Keywords:

• cost benefit analysis
• publicly provided goods
• social welfare

JEL Classifications:

• D61
• H4
• I3

Acknowledgements

Earlier versions of this paper have been presented at the Tenth Milan European Economy Workshop and at the Eleventh Public Management Research Association (PMRA) Conference, Syracuse (New York State). The authors are grateful to the participants, to Mildred Warner and an anonymous referee for helpful comments. The usual disclaimer applies.

Notes

1. For analytical details on the DS model, see Del Bo and Florio (2011).

2. Mathematically this is the first-order condition of the planning problem, equivalent in general to setting to zero the first partial derivative of social welfare relative to the control variable.

3. Alternatively, and equivalently from an analytical perspective, the government may fix the signals that lead the private sector to a certain output and the government’s production plan is designed in such a way as to match the excess net private demand.

4. For the micro-economics of rationed demand see Neary and Roberts (1980).

5. On other determinants of corruption, see Márquez et al. (2011).

6. As mentioned, we assume that project selection is instead a transparent computation based on the available information and shadow prices.

7. For a discussion of the CBA of privatization, see Jones et al. (1990), Newbery and Pollitt (1997), Florio (2004).