Privatisation and information

Over at the Offsetting Behaviour blog Eric Crampton quotes from the conclusion to my recent NZEP paper on the theory of privatisation. Eric highlights the problems that the ex ante restrictions that governments often place on privatisation schemes can cause.

From Walker's conclusion

...there is an implicit assumption in the literature discussed above that economic efficiency is a major objective of privatisation but the, ex ante, conditions sometimes imposed by governments on the sale of assets often serve political rather than economic ends. Examples of such conditions are things like the New Zealand government’s restrictions on foreign ownership and the desire to sell to ‘Mums and Dads’, both of which restrict the number of possible bidders. Such conditions also result in fragmented ownership, making it difficult for owners to coordinate their efforts to effect the firm’s behaviour. In addition, given that each ‘Mum or Dad’ will own only a very small share of any of the firms, they have little incentive to become informed on the firm’s activities since they will only capture a very small amount of any improvement in performance they could bring about. These factors suggest that, in practice, little will change in terms of the behaviour of the SOEs: they will remain, for all intents and purposes, government-controlled entities. This contradicts the very reason for privatising SOEs in the first place.

While I completely agree with myself, let me add that ex ante restrictions are not the only cause of problems with privatisation programs. Badly designed ex post rules can also result in bad outcomes from privatisation:

...an important driver of several of the results presented above is the degree to which politicians can interfere, ex post, with the operations of the firm. The lower the cost of interference, the greater the likelihood of firms being induced to serve political rather than economic ends. This highlights the importance of post-privatisation regulation, and competition, to the outcome of an asset sales programme.

The easier and (politically) cheaper it is for politicians to interfere with firms after they have been privatised the more likely it is that the results of a privatisation program will be poor. A strong ex post framework which emphasises competition and raises as high as possible the costs to political interference with the privatiased firm the better the outcomes to privatisation are likely to be.