An Agency Perspective on the Costs and Benefits of Privatization

This paper proposes a unified theoretical framework to discuss the costs and benefits of privatization using the recent advances of Incentive Theory. I begin by presenting a simple model in which the State (the principal) delegates a task (e.g., the production of a public good) to the private sector (the agent). I give and discuss conditions for the “Irrelevance Theorem” due to Sappington and Stiglitz Sappington, D., & Stiglitz, J. (1987) Journal of Policy Analysis and Management, 6, 567–582] to hold under complete contracting. I then show how various contract incompletenesses can make either public or private ownership optimal. Finally, I provide critical assessments of these results. I thank Patrick Rey and Wilfried Zantman for useful comments on an earlier draft. The excellent comments of two referees have also improved substantially the presentation and organization of the paper. I am deeply indebted to Denis Gromb for his extremely detailed comments.