Objectives and Incentives: Evidence from the Privatisation of Great Britain's Power Plants

Abstract

Does privatisation increase firm productivity because the private owner’s objective is different, or because she is better able to control management? Is privatisation sufficient to improve productivity, or is it only effective in combination with competition? We answer these questions for Great Britain’s electricity industry privatisation. We separate the effects of changes in objectives from changes in incentives by assuming, that the former only affect labour but not fuel productivity. And assuming that effective competition was only introduced after privatisation, we are able to separately identify the effects of privatisation and competition. We find that privatisation increased labour but not fuel productivity: evidence for the importance of objectives. There is some evidence that effective competition increased labour, but not fuel productivity. If there was an additional effect of competition, it was weak.

Keywords: privatisation, competition, productivity, electricity generation

JEL Classification: L33, L22, L94