Towards a Property Rights View of Government Ownership
Posted: 16 May 2000
Date Written: October 22, 1999
This work explores the idea that governments use direct public ownership to make credible commitments to other agents in the economy. We argue that governments exercise indirect control rights over other agents' cash flows: direct ownership is a means of mitigating the holdup problems that arise when the government cannot commit to avoid abusing these rights. The empirical implication of this theory is that more credible governments take lower direct ownership of the economy, since they have fewer holdup problems to solve. With a unique panel comprising measures of ownership, credibility, and expenditure, for nearly 100 countries over a 10-year period, we find strong evidence in support of our propositions. To distinguish our story from alternatives we study the how the credibility-ownership relation varies with other measures. We find more pronounced results among industrial nations than developing ones. The tendency for high expenditure governments to own more diminishes as credibility increases. These results persist after instrumenting credibility with a country's origin of legal system and controlling for unobserved country-specific heterogeneity.
JEL Classification: G3, K0, P3
Suggested Citation: Suggested Citation