Wednesday, 8 April 2009

Public v's private performance: the cold facts (updated)

This has to be the coolest paper ever on the trying to workout if there is a difference between the performance of government-organised production versus privately organised production. Jonathan M. Karpoff, "Public versus Private Initiative in Arctic Exploration: The Effects of Incentives and Organizational Structure", Journal of Political Economy, February 2001, v. 109, iss. 1, pp. 38-78. I came across this example in William L. Megginson's book The Financial Economics of Privatization, New York: Oxford University Press, 2005, pp. 47.

Karpoff's paper exploits a very interesting and unique natural experiment to compare the performance of government-organised versus privately organised production. Karpoff studies a comprehensive sample of 35 government-funded expeditions and 57 privately funded expeditions to the Arctic from 1818 to 1909 seeking to locate and navigate a Northwest Passage, discover the North Pole, and make other discoveries in arctic regions. I guess these are the cold hard facts!

He finds that the private expeditions performed better using several measure of performance. Karpoff shows that most major arctic discoveries were made by private expeditions, while most tragedies - in terms of lost ships and lives - were on publicly funded expeditions. Karpoff notes that the public expeditions might have had greater losses because they took greater risks, but then the public expeditions would have had a greater share of discoveries, which did not occur.

Karpoff also estimates regressions explaining outcomes in several ways-crew deaths, ships lost, tonnage of ships lost, incidence of scurvy, level of expedition accomplishment - controlling for exploratory objectives sought, country of origin, the leader's previous arctic experience, or the decade in which the expedition occurred. In essentially every regression, the dummy variable for private expedition is significant, with a sign indicating that the private expedition performed better. Karpoff concludes that the incentives were better aligned in the private expeditions, leading to systematic differences in the ways public and private expeditions were organised. While the uniqueness of the sample limits its generality, Karpoff provides an interesting illustration of the impact of ownership on the performance of an organisation.

Update: Given this result the Adam Smith Institute blog asks: What implications does this have for NASA and the ESA? A good question.

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