David Farrar just doesn't get it.

With regard to the mixed ownership model David Farrar writes,

This is the model that the unions and their allies have tried to destroy.

Everyone is a winner – the Bay of Plenty Regional Council and its ratepayers, Port of Tauranga’s minority shareholders and the company itself.

It is totally inappropriate to look at partial privatisation as a zero sum game, a game where there must be a loser for every winner. Partial privatisation can lead to a substantial increase in value and income for a regional council, or the government, if the listed company is well governed and managed.

Absolutely. There can be no argument that privately owned and managed companies do better overall than wholly owned public ones. By this I do not mean no private companies fail and no public companies succeed. Of course not. But if you look at decades of economic data across OECD countries, the difference is stark.

Yes and if you look at the economics literature you will also find that fully private companies outperform mixed ownership firms. Some insight on this is offered by a recent paper in the Scottish Journal of Political Economy (Volume 59, Issue 1, pages 1–27, February 2012). The paper "What Drives the Operating Performance of Privatised Firms?" by Laura Cabeza García and Silvia Gómez Ansón argues that the greater the amount of privatisation the better the performance of the firm. Not an entirely surprising result as the full force of market discipline can only be applied if the firm is fully in private hands but it is something for the government to keep in mind. It would suggest that any performance improvements due to the government's partial privatisation plans will be modest.

The abstract reads,

Using a panel data analysis of Spanish privatised firms, we study how different factors influence the operating performance of divested companies. The results show that it is not privatisation per se but other factors that matter. After controlling for possible sample selection bias related to government timing of divestments, we find that the greater the relinquishment of State control and the smaller the percentage of ownership held by managers and/or employees, the better the firms’ post-privatisation performance. Moreover, privatisations that are accompanied by liberalisation programmes and occur during buoyant economic cycles turn out to be more successful. (Emphasis added.)

When you look at the performance of mixed ownership firms they don't do as well as fully privately owned firms. For example, Aidan Vinning and Anthony Boardman in "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises", Journal of Law and Economics vol. XXXII (April 1989) conclude

'The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs perform substantially worse than similar PCs [private corporations].'

So fully private firms out-perform mixed ownership firms. Thus if Farrar followed his own logic he would be arguing for 100% privatisation of SOEs.

A case study in privatisation

At the IEA blog Wayne A. Leighton discusses the telecom reforms undertaken in Guatemala. He writes,

In 1996, Guatemala adopted one of the most market-oriented telecom reforms in the world. The benefits to the country followed quickly as coverage expanded, competition surged, and prices plummeted.

He then asks the question, So, what is special about the Guatemalan experience? His answer:

Firstly, Guatemala’s reform was based solidly on market principles. Secondly, it was a huge success, providing greater consumer benefits than reforms in most other countries.

One of the most significant aspects of the Guatemalan experience is that the market was opened to competitors before the state-run telecom monopoly was privatised. Most countries did the opposite, selling the government’s monopoly phone company at a high price and promising to open the market at a later date. While such an approach put a lot of funds in these governments’ treasuries, it also created a private monopoly with the incentive to lobby for slow and cautious market liberalisation. By contrast, in Guatemala the buyer of the state phone company would have no special privileges and its competitors would face no special restrictions.

An interesting point here is that opening the telecom market to competition before privatisation highlights the importance of a point I have made before that getting the highest possible price when selling an SOE isn't always the best policy. Selling the SOE as a monopoly would have generated more money for the government but would have, as Leighton notes, slowed, or even stopped, the liberalisation of the telecom market and thus stopped the benefits that flowed to consumers from the privatisation and liberalisation.

In addition,

The other key aspect of reform is that it fostered a free market in the airwaves (electromagnetic spectrum). Guatemala created what are essentially property rights to the spectrum. This matters greatly, because access to spectrum is needed for wireless communications, and in low-income countries wireless is the most cost-effective way to extend service.

and

Significantly, the right to use spectrum in Guatemala for commercial purposes was not defined as a licence, as is the case in many other countries. Rather, usufruct titles were issued, which grant much more flexibility to determine how the spectrum will be used, subject to very basic restrictions on interference and international agreements. This closely approximates a property right. It creates greater certainty for wireless providers and greater potential for the spectrum to be put to its highest valued use.

The message here: getting property rights right matters.

EconTalk this week

Scott Sumner of Bentley University and blogger at The Money Illusion talks with EconTalk host Russ Roberts about the basics of money, monetary policy, and the Fed. After a discussion of some of the basics of the money supply, Sumner explains why he thinks monetary policy in the United States during and since the crisis has been inadequate. Sumner stresses the importance of the Fed setting expectations and he argues for the dominance of monetary policy over fiscal policy.

The architecture of innovation

From VoxEU.org comes this audio in which Josh Lerner of Harvard Business School talks to Romesh Vaitilingam about his book "The Architecture of Innovation: The Economics of Creative Organizations". They discuss a variety of issues around the challenges of innovation, including corporate venturing, venture capital-based enterprises, patents and public investment in science.

EconTalk for three weeks

Leigh Steinberg, legendary sports agent, talks with EconTalk host Russ Roberts about his career as a sports agent. He discusses the challenges of building a clientele, how sports agents spend their time, strategies for building a brand as an athlete, and safety issues currently affecting the National Football League.

Doc Searls, author of The Intention Economy and head of Project VRM at Harvard University's Berkman Center talks with EconTalk host Russ Roberts about the how the relationship between buyers and sellers might evolve as the internet evolves. Searls imagines a world where buyers would advertise their intentions and desires and sellers would respond with offers. Other topics discussed include Google and Apple's business strategies and the role of the cable and telephone companies in providing access to the internet.

Angus Burgin of Johns Hopkins University and the author of The Great Persuasion talks with EconTalk host Russ Roberts about the idea in his book--the return of free market economics in the aftermath of the Great Depression. Burgin describes the reaction to Hayek's Road to Serfdom, the creation of the Mont Pelerin Society, and the increasing influence of Milton Friedman on public policy.

Incomplete contracts and the internal organisation of firms

The theory of the firm - or organisational economics - spends much time on asking questions about the boundaries of the firm, about where one firm ends and the next one begins and where firms end and markets take over. But such questions are not the only ones asked by economists. Increasingly questions are also being asked about the internal organisation of firms. Like the boundary questions the standard approach to the internal structure of firms is that of incomplete contracts. Recently Philippe Aghion, Nicholas Bloom and John Van Reenen have released a NBER working paper that looks at the literature on the internal organisation of firms. Their paper is Incomplete Contracts and the Internal Organization of Firms and the abstract reads:

We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.

Unemployment is bad for employment

No really!

The following is a summary by Lester Picker, from the latest (March 2013) NBER Digest, of the findings of the paper, Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387) by Kory Kroft, Fabian Lange and Matthew J. Notowidigdo. Lester writes,

According to a recent report by the Congressional Budget Office, long-term unemployment may "produce a self-perpetuating cycle wherein protracted spells of unemployment heighten employers' reluctance to hire those individuals, which in turn leads to even longer spells of joblessness." Policymakers and researchers alike tend to believe that this adverse effect of a long spell of unemployment undermines the smooth functioning of the labor market and entails large social costs. Economists refer to the phenomenon as "negative duration dependence."

In Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387), authors Kory Kroft, Fabian Lange, and Matthew Notowidigdo confirm that the likelihood of receiving a callback for a job interview sharply declines with unemployment duration. This effect is especially pronounced during the first eight months after becoming unemployed. Their estimates suggest that this effect is quantitatively important, and that duration dependence is stronger when jobs are relatively abundant. These results imply that employers statistically discriminate against workers with longer unemployment durations and that employer screening plays an important role in generating duration dependence.

To study duration dependence, the authors submitted fictitious resumes to real, online job postings in each of the 100 largest metropolitan areas in the United States, and then tracked "callbacks" from employers for each submission. In total, they "applied" to roughly 3,000 job postings in Sales, Customer Service, Administrative Support, and Clerical job categories, submitting roughly 12,000 resumes. The resumes they created characterized the "applicant's" employment status and, if unemployed, the length of the current unemployment spell, which ranged from 1 to 36 months and was randomly assigned. As a result, this experiment directly uncovered duration dependence arising through employers' beliefs about unemployed workers.

In short, the longer you are unemployment the less likely it is that you will become employed.