The entrepreneurs choice between private and public ownership

We analyze an entrepreneur/manager’s choice between private and public ownership. The manager needs decision-making autonomy to optimally manage the firm and thus trades off an endogenized control preference against the higher cost of capital accompanying greater managerial autonomy. Investors need liquid ownership stakes. Public capital markets provide liquidity, but stipulate corporate governance that im-poses generic exogenous controls, so the manager may not attain the desired trade-off between autonomy and the cost of capital. In contrast, private ownership provides the desired trade-off through precisely calibrated contracting, but creates illiquid owner-ship. Exploring this tension generates new predictions. The battle for Safeway raises an old but important question: is it better to be a private company than to be a public one? The Economist, January 25th 2003, p. 57 Should a firm be publicly or privately owned? Public ownership involves pub-licly traded shares and public corporate governance, with diffused ownershi