Thursday, 31 May 2012

Council asset sales

Over at Offsetting Behaviour Eric Crampton has been taking  More on Council asset sales. In a piece in Christchurch's "Mainland Press" Eric rightly makes the basic point that ownership of an asset should go to whoever uses it more efficiently. He also says,
A fully privatised power lines company would wind up being subject to public monopoly regulations that would mean there's little gain from having it in private as compared to public ownership; private owners then would be willing to pay council just enough for the asset to offset council's loss of dividends.
This may not be true. In a couple of papers, Schmidt (1996a,b), Klaus M. Schmidt developed models of privatization using an incomplete contracts approach. He argues that different allocations of ownership rights lead to different allocations of inside information about the firm, which in turn affect both allocative and productive efficiency. Privatization is seen as a commitment device of the government to credibly threaten to cut back subsidies if costs are high in order to give managers better cost-saving incentives (a "harder budget constraint"). This leads to a gain in productive efficiency. The cost of privatization is that allocative efficiency is distorted. But if the loss in allocative efficiency is less than the gain in productive efficiency than privatisation makes sense. This is true even in the case that Eric considers, that of a natural monopoly.

One point Eric makes that is worth keeping in mind is that selling bonds and selling assets are basically the same.
So there isn't a lot of difference between council's selling some shares in Orion and council's selling some bonds, so long as people are willing to buy debt from council.
In one case there is a loss of future revenue and in the other there is an increase in future repayments. Both are ways of getting money now.
  • Klaus M. Schmidt (1996a.) 'The Costs and Benefits of Privatization: An Incomplete Contracts Approach', Journal of Law, Economics, & Organization, Vol. 12, No.1 (April), 1-24.
  • Klaus M. Schmidt (1996b.) 'Incomplete contracts and privatization', European Economic Review, vol. 40, 569-579.

1 comment:

Eric Crampton said...

No disagreement. But I'd expect smaller gains from privatizing Orion than from privatizing the Port. So start with the Port.