Ownership Versus Environment: Disentangling the Sources of Public Sector Inefficiency

52 Pages Posted: 20 Apr 2016

See all articles by Ann P. Bartel

Ann P. Bartel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Ann E. Harrison

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: January 2000

Abstract

Is public sector inefficiency due primarily to agency-type problems (ownership) or to the environment in which public enterprises operate (as measured by soft budget constraints or barriers to competition)? Both. Bartel and Harrison compare the performance of public and private sector manufacturing firms in Indonesia for 1981-95. They analyze whether public sector inefficiency is due primarily to agency-type problems (ownership) or to the business environment in which public enterprises operate, as measured by soft budget constraints or barriers to competition. They nest the two alternatives in a production function framework. The results, obtained from fixed-effects specifications, provide support for both models.

The business environment matters. Only public enterprises that received loans from state banks or those shielded from import competition performed worse than private enterprises. Ownership matters. For a given level of import competition or soft loans, public enterprises perform worse than their counterparts in the private sector. Eliminating soft loans to Indonesia's public enterprises would raise total factor productivity by 6 percentage points; the same result could be achieved by increasing import penetration by 15 percentage points. Bartel and Harrison show that these findings are not due to selection effects for either privatization or the receipt of soft loans.

This paper - a product of Poverty and Human Resources, Development Research Group - was part of a study funded by the Bank's Research Support Budget under the research project The Impact of Labor Market Policies and Institutions on Economic Performance (RPO 680-96).

Suggested Citation

Bartel, Ann P. and Harrison, Ann E., Ownership Versus Environment: Disentangling the Sources of Public Sector Inefficiency (January 2000). Available at SSRN: https://ssrn.com/abstract=629122

Ann P. Bartel (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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Ann E. Harrison

University of California, Berkeley ( email )

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National Bureau of Economic Research (NBER)

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