Virtual Privatization: Governance Reforms for Government-Owned Firms

46 Pages Posted: 10 Jul 2002

See all articles by David A. Skeel

David A. Skeel

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)

Date Written: March 2002


This article explores three different kinds of reforms that could be used to help governmental corporations achieve some of the benefits of privatized, market-based governance without giving up governmental control. The first, and simplest, proposal is to use an annual contract between GOC managers and their ministerial shareholders to reduce managerial agency costs. In addition to providing a benchmark for managerial performance, the contract also could be used to segment the GOC's different goals in order to minimize the downside effects of having multiple principals (with multiple objectives) monitoring the manager-agents. Second, I suggest that requiring at least some GOC's to issue subordinated debt would create a class of private investors who could provide additional monitoring as well as market signals about the prospects of the firm. Finally, I focus on various boundary problems with GOC's, as compared to private firms. I argue that GOC's should be required to set up separate subsidiaries when they expand into new product areas. Requiring the GOC to set up a separate subsidiary would make it much easier to police inappropriate cross subsidization.

JEL Classification: G38

Suggested Citation

Skeel, David A., Virtual Privatization: Governance Reforms for Government-Owned Firms (March 2002). U of Penn Law & Economics Research Paper No. 02-12. Available at SSRN: or

David A. Skeel (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-573-9859 (Phone)
215-573-2025 (Fax)

European Corporate Governance Institute (ECGI)

B-1050 Brussels

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