Wednesday, 20 October 2010

Confusion on ownership

Recently over at the Stumbling and Mumbling blog Chris Dillow discussed the problems involving the ownership of the Liverpool football club, which does look somewhat strange. But he seems to be confused over what ownership is all about. He writes,
The Hicks-Gillett saga shows that, despite the impression given by Jimmy Tarbuck and Stan Boardman, great comedy can come out of Merseyside. It also throws into question the standard view about the ownership of assets generally (I’d call it the neoliberal view if I were a pretentious git.)
How I have to say I have never come across a "neoliberal" view of ownership so I'm not too sure what exactly Dillow is on about. Does he mean a transaction cost view, property rights view, reference point view or ....? But I go on hoping I can make sense of his argument.

Dillow continues,
This says that it is efficient for the ownership of an asset to go to the highest bidder. This is because the very act of bidding most for an asset suggests that a man knows best how to maximize its value. A free market in assets, then, ensures that assets go to those best able to manage them.

Hicks and Gillett’s mismanagement of Liverpool, however, shows that this story isn’t right all the time; highest bidders - as they were once - can make a horrible mess.
Yes, they can make a horrible mess but the point of a free market in ownership is that if they do then they will lose control of the firm, or football club, which is what has happened. Giving ownership to the highest bidder doesn't guarantee that the best use of the asset will occur but it does increase the probability of it. No method of ownership determination can guarantee optimal asset use.

Dillow than asks:
Which raises the question: what is wrong with this standard story?
and say four things are:
Over-confidence. It’s well-known that bidders can overpay for assets - the winner‘s curse is a cliche. This is especially likely when those bidders are entrepreneurs who have been successful in other businesses. Such men are selected twice over for their overconfidence. Once, because the very act of becoming an entrepreneur in the first place betokens an overconfidence. And twice, because previous success further raises that confidence and breeds the belief that the ability to own baseball clubs or mobile phone shops gives one the ability to own a football club.

Ownership, then, doesn’t flow to the most competent potential owner, but to the most deluded.
See my point above. If they are "deluded" this will soon be found out and given a free market in ownership, the ownership of the asset will change. Which is what you would want.
Ownership does not confer genuine power. In the case of football clubs, real power - the ability to extract cash - lies with players, not owners; Alan Sugar called this the prune juice effect. Similarly, in banks shareholders lacked power to control excessive risk-taking.
That ownership and "power" may not be the same is well known, see for example, Jean Tirole and Philippe Aghion, "Formal and Real Authority in Organizations", Journal of Political Economy, vol. 105, n. 1, February 1997, p. 1-29. Why Dillow thinks "the ability to extract cash" is ownership or power I can't see. "The ability to extract cash" will have more to do with markets conditions than ownership. If you are a monopoly, for example, then you have more "ability to extract cash" than a competitive firm, but this has nothing to do with ownership. Ownership is about control rights (and maybe income rights) independent of "the ability to extract cash". If you went from being a monopoly to being a competitive firm "the ability to extract cash" would change but does this mean that ownership or power has changed? I can't see how.

As to the "banks shareholders lacked power to control excessive risk-taking" point, ownership isn't about being able to control the actions of the management and workers perfectly. Its about being able to do so better than an alternative set of owners. This doesn't mean that the owners have perfect control of the firm, they don't, no set of owners would have; it means they have better control than the alternative owners.
The collective action problem. The people with the best knowledge or incentive to manage an asset might be a dispersed group; fans in the case of football clubs or employees in the case of other companies. Organizing such a group, however, can be prohibitively tricky.
This is true, but if those with the "best knowledge or incentive to manage an asset" are a "dispersed group" then you have to ask if they really are those who should be the owners. Hansmann makes the point that homogeneity of interest is important for the group that are the owners of a firm. Would the fans really have such a homogeneity of interest? They may not care too much about profits - the normal thing that investors have in common- they are fans after all, but they may care about other things, who's the manager, who are the players, which players should play, who the sponsors of the team should be etc, and assuming they all can't agree, this results in heterogeneity of interests, which is bad for ownership.
Capital constraints. The standard view assumes that the people best able to maximize an asset’s value will be able to raise the cash to buy it. But this needn’t be true. Even the wealthy Red Knights were unable to put together a bid for their club, so it was always going to be impossible for Liverpool fans to do so, with one job between them. And of course, the point here extends way beyond football clubs.
Why is it impossible for Liverpool fans to bid for the club? Why can't they just sell shares in the club and raise money the same way any investor-owned firm does? If there are enough fans, and I'm guessing there are, then why can't they use the standard methods of raising funds from small investors that all share-holder owned firms do?

Part of Dillow's conclusion is that:
These four difficulties undermine the standard argument for a free market in ownership [...]
I would say not. In fact what the whole Liverpool things shows is that free markets in ownership work. If you are the owner of an asset and use it badly someone else will be able to take ownership away from you and this is what we have seen. Ownership is determined by profit and loss, if you make a (big enough) loss you will lose ownership. This is how you give the best incentives to owners and how you move assets into the hands of those who really do value them most and who will use them most efficiently. The system can take time and isn't always perfect in the way it works, but we have yet to come up with a better method.

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