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 (1987) 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. 1I 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. 2University of Toulouse, (IDEI, GREMAQ) and Institut Universitaire de France