When Should the Government Own the Physical Assets Needed to Provide Public Goods?

Schmitz, Patrick W. (2024): When Should the Government Own the Physical Assets Needed to Provide Public Goods?

Abstract

Consider a government and a non-governmental organization (NGO) who can collaborate to provide a public good using physical assets. Who should be the owner of the assets if the NGO can make non-contractible investments? In the literature it has been argued that whoever has a larger valuation of the public good should be the owner. Yet, this result was derived under the assumption of symmetric information. We study the case in which the NGO gets privately informed about the quality of the public good. It turns out that public ownership becomes more attractive if the probability of a high quality is relatively small, whereas ownership by the NGO becomes more attractive otherwise.

• Item Type: MPRA Paper
• Language: English
• Keywords: public goods; property rights; investment incentives; asset ownership; incomplete contracts
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C78 - Bargaining Theory ; Matching Theory; D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L31 - Nonprofit Institutions ; NGOs ; Social Entrepreneurship

References

Bajari, P., Tadelis, S., 2001. Incentives versus transaction costs: A theory of procurement contracts. Rand Journal of Economics 32, 387--407.

Besley, T., Ghatak, M., 2001. Government versus private ownership of public goods. Quarterly Journal of Economics 116, 1343--1372.

Buso, M., 2019. Bundling versus unbundling: Asymmetric information on information externalities. Journal of Economics 128, 1--25.

Chazan, G., Kazmin, A., 2023. Elon Musk wades into German-Italian migration spat. Financial Times. October 2.

Francesconi, M., Muthoo, A., 2011. Control rights in complex partnerships. Journal of the European Economic Association 9, 551--589.

Fudenberg, D., Tirole, J., 1991. Game Theory. Cambridge, MA: MIT Press.

Grosjean, P., 2010. Maintenance costs, outside options and optimal ownership of a public good. BE Journal of Economic Analysis and Policy, 10.

Grossman, S.J., Hart, O.D., 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94, 691--719.

Halonen-Akatwijuka, M., 2012. Nature of human capital, technology and ownership of public goods. Journal of Public Economics 96, 939--945.

Halonen-Akatwijuka, M., Pafilis, E., 2014. Location and ownership of public goods. Economics Letters 123, 395--397.

Halonen-Akatwijuka, M., Pafilis, E., 2020. Common ownership of public goods. Journal of Economic Behavior and Organization 180, 555--578.

Hart, O., 2021. A quarter century of `The proper scope of government': Theory and applications. Stanford Asia Health Policy Program, Working Paper #64.

Hart, O., Moore, J., 1999. Foundations of incomplete contracts. Review of Economic Studies 66, 115--138.

Hart, O., Shleifer, A., Vishny, R.W., 1997. The proper scope of government: Theory and application to prisons. Quarterly Journal of Economics 112, 1127--1161.

Hoppe, E.I., Schmitz, P.W., 2013. Public-private partnerships versus traditional procurement. Rand Journal of Economics 44, 56--74.

Li, S., Sun, H., Yan, J., Yu, J., 2015. Bundling decisions in procurement auctions with sequential tasks. Journal of Public Economics 128, 96--106.

Moore, J., 2016. Introductory remarks on Grossman and Hart (1986). In: Aghion, P., Dewatripont, M., Legros, P., Zingales, L. (Eds). The Impact of Incomplete Contracts on Economics. Oxford University Press.

Riley, J., Zeckhauser, R., 1983. Optimal selling strategies: When to haggle, when to hold firm. Quarterly Journal of Economics 98, 267--289.

Schmitz, P.W., 2006. Information gathering, transaction costs, and the property rights approach. American Economic Review 96, 422--434.

Schmitz, P.W., 2008. Joint ownership and the hold-up problem under asymmetric information. Economics Letters 99, 577--580.

Schmitz, P.W., 2013. Incomplete contracts and optimal ownership of public goods. Economics Letters 118, 94--96.

Schmitz, P.W., 2021. Optimal ownership of public goods under asymmetric information. Journal of Public Economics 198, 104424.

Schmitz, P.W., 2023. The proper scope of government reconsidered: Asymmetric information and incentive contracts. European Economic Review, 157, 104511.

Squires, N., 2023. Meloni criticises Scholz for funding migrant rescues from Mediterranean. The Telegraph. September 25.