27 Apr 2009

One More Thing

When I posted the abstract from this paper, I had not read it. This excerpt deserves further comment:
Rosa (1993) and Rosa and Perard (2007) propose another explanation of privatization and nationalization movements in the economy in general. They “consider that the government’s motive is the same than the private investor’s motive: to control the firm’s profit or cash flow in order to further one’s own interests. In the case of government, the one and major interest is political power and survival. In order to succeed any government has to transfer some wealth to supporters, on top of consuming resources by itself. Instead of distributing profits to shareholders or retaining resources for the manager, the state as owner uses the firms’ resources to grant rents and advantages to selected and useful (to him) clienteles thus aiming at maximizing his chances of staying in power. Thus both types of investors, whether private or government, value firms for the cash flow they produce even though the beneficiaries of the cash flow they have in mind are different.”

Since both private sector and governments are interested in firms, the one who value the firm the most proposes the highest bid. It results in privatization if private valuation is the highest one and nationalization if public valuation outbid the private’s one. The difference of economic valuation determines the allocation of property rights
Put differently, the legal structure for water provision does NOT depend on efficiency or quality, but on the political gains from each structure. In the US, private provision is MORE likely (according to Perard's statistical analysis) when
  • the social cost of taxes is high;
  • the government already has experience with outsourcing (public provision of other services, including sewerage, has a negative impact);
  • population density is high;
  • there are fewer public employees (voters) in the area; and
  • the area leans towards Republicans.
Interesting indeed!

Bottom Line: Politics matters more than you think!