Measuring costs per unit of output, the authors find that privatization increased the efficiency of firms operating in both competitive and non-competitive environments, and that the efficiency gains from privatization were significantly greater in non-competitive environments than in competitive ones.These results provide a uniquely controlled setting in which to study the effect of competition on relative efficiency, and also the relative importance of agency issues and soft budget constraint issues in publicly-owned firms.Since public firms should become less relatively less efficient than prive firms as competition increases, because soft budget constraints shield them from competitive pressures, and relatively more efficient as competition increases, because the observable performance of other firms reduces agency issues, the fact that efficiency gains from privatization attenuated with the level of competition provides evidence that the effects of agency issues dominated the effects of soft budget constraints in this study.The study also documents the existence of subsidies to public firms prior to privatization – amounting to 12.7% of GDP in Mexico – suggesting that reductions in agency-related issues due to competition had to surmount substantial soft budget constraint issues that presumably increased with the level of competition that firms faced.Because La Porta and Lopez-de-Silanes separates ownership effects by competition level, examines a large number of firms, and is exceptionally careful and thorough in its approach, it is one of the most persuasive studies in providing evidence of the effects of competition on ownership efficiency.The vast majority of studies that examine public and private efficiency differences in noncompetitive settings are studies of privatization efforts that compare the performance of enterprises before and after state ownership.
A complication in studying privatization programs is that ownership effects could take place gradually,nft hydroponic and might not be adequately captured just after privatization takes place.Additionally, the announcement of a government’s intentions to privatize sometimes preceded the actual transfer of ownership by several years, during which the perception of ownership transferrability and a period of “shake-out”could increase public firm efficiency.Lastly, privatization programs are typically accompanied by other regulatory changes – in particular, many governments shielded state-owned firms from competition, and undertook market liberalization measures either concurrently with privatization, or after a grace period during which newly privatized firms are shielded from competition.Unless these liberalization effects are separated, studies may compare public monopolies to private firms operating with limited competition, and thus conflate the effects of competition and ownership on efficiency.Of the 9 studies in non-competitive environments in our review, 5 study privatizations of telecommunications firms.Within this industry, Wallsten and Boylaud and Nicoletti both find no ownership effects from privatization, while Ros , Ramamurti , and Boles de Boer and Evans find that private firms are more efficient than state-owned firms.Wallsten studies the privatization of telecom monopolies in 30 countries across Africa and Latin America, from 1984 to 1997.Controlling for competition changes and other concurrent programs that may have affected firm efficiency, he finds no effect of privatization on labor productivity in the absence of additional regulatory measures.When privatized firms are faced with price regulation from an independent regulator, though, privatization yields efficiency benefits.This result is consistent with theory: By keeping prices low, regulators essentially create the pressure for efficiency that competition does, which differentially affects private firms if public firms face soft budget constraints.
Boylaud and Nicoletti study telecom privatizations in 23 OECD countries from 1991 to 1997, and similarly conclude that ownership did not affect labor productivity, when controlling for the level of competition and also the time to liberalization.However, both the number of competitors and decreases in the time to liberalization are associated with increases in productivity.The authors interpret the effects of time to liberalization as being due to the effects of potential competition, which may have stimulated managers and employees in public firms to increase efforts to avoid unemployment as profit margins were reduced.Such responses may be partially attributable to an anticipated reduction in cross subsidization across internal groups, which the authors describe as common prior to privatization.However, diminished agency issues would only occur when actual competitors emerged, and the separately significant effect of the number of competitors provides evidence that agency issues are important.Notable in this study is the fact that the government “generally maintained the largest single share of the PTOs capital and sometimes retained special voting rights in the privatised enterprises.”Indeed, some studies find that ownership change is only effective when firms are fully privatized.Ros , Ramamurti , and Boles de Boer and Evans all find productivity improvements in telecom firms following privatization.Ros studies a mix of firms that were either privatized during the period from 1986 to 1995, or were private throughout the period, and measures ownership effects on labor productivity while controlling for competition.Ramamurti finds significant ownership effects in 3 of 4 telecoms studied, but does not separate competition and ownership effects, and acknowledges that the level of competition may have changed after privatization.Boles de Boer and Evans provide a case study of the 1990 privatization of Telecom New Zealand, and study efficiency changes during the period from 1987, when the market was liberalized, to 1993, when the first actual competitors entered.
As a case study, the evidence the auhtors present is inherently less generalizable than that of other studies.On the other hand, the authors are less restricted to use variables that are common across all firms being studied, and can be precise about the levels of competition and other contextual details of the privatization.The study measures productivity as the level of output per cost of inputs, where inputs include labor, material inputs, and capital.They find that productivity increased by 10% per year during the study period, and that unit costs reduced by 5.8% per year.Like Ramamurti , the authors do not separate the effects of competition and ownership in their examination; however, competitors only emerged in the final year of the study, and potential competition due to deregulation was present throughout.A concern permeating all the telecom studies is that the effects of ownership are averaged across both the monopoly conditions and conditions of limited competition following market liberalization, making it impossible to isolate the precise market conditions under which these effects occur.Caves and Christiansen provides some evidence on ownership effects in a static competitive environment, by comparing two Canadian railroads – one private, one state owned – who were each other’s sole competitors for many decades.Measuring the cost of inputs per unit of output, they find that the state-owned railroad was initially less productive than the private one, but find no significant differences between the two by the end of the 19- year study period.Since the railroads began to compete 30 years prior to the study period, their findings suggest that efficiency improvements may take a very long time to adjust to a change in the level of competition.Assuming this is true, the privatization studies that average efficiency effects across short periods of time during which monopolies were exposed to competition may be best placed as studies reporting relative efficiencies under monopoly conditions.Both Caves and Christiansen and Ramamurti make another contribution to the analysis: While they both study railroads that faced little or no direct competition , both argue that the railroads they study faced substantial indirect presure from other forms of transportation that competed for both passengers and freight.Ramamurti explicitly documents the market share of the Argentinian railroad he studies, and finds that only 8% of freight and intercity travel were handled by the railroad, along with 15-20% of suburban travel.Since ameliorating agency issues requires the observation of direct competitors, both studies exist in a non-competitive environment for agency purposes.However, indirect competitive pressure reduced prices and profit margins, and thus expand the efficiency gap between public and private firms due to soft budget constraints.With both unmitigated agency issues and exacerbated soft budget constraint issues, theory would predict the efficiency gap between these railroads to be at their largest.
Indeed, Ramamurti finds that privatization resulted in a 370% increase in labor productivity,nft system and explicitly documents the existence of railroad subsidies to the state-owned Argentinian railroad prior to privatization.Caves and Christiansen, who paradoxically find no significant differences by the end of their study, also point out that the state’s role was “restricted to that of a stockholder”in their study – no subsidies were provided to the state owned railroad.Both of these studies point to the potential relevance of state subsidies in reducing efficiency gains, particularly in environments where firms face substantial competitive pressure.Ehrlich et al conduct a very careful study of 23 airlines with varying ownership types, and estimate a model wherein productivity is endogenously and separately determined for each airline.The authors include several robustness checks using alternate specifications, and do not consistently find level differences between the cost efficiencies of private and public airlines across all specifications.However, they find that private firms have a relatively higher rate of cost reduction over time in each specification that they test.To examine whether ownership effects vary with competition levels, the authors separately test the efficiency of the subset of airlines in the US, Canada, France, and the UK, arguing that that they exist in competitive environments because there are more domestic competitors within these nations.Although the authors find qualitatively similar results for these airlines, it is unclear whether airlines in those four countries might not face very different competitive environments from airlines that are the sole carriers for their countries, to the extent that airlines compete internationally, and also because – as the authors themselves point out – the International Air Transport Association coordinated fares and erected barriers to entry for all airlines during the period of study.Also notable in this study is the fact that both private and public airlines have historically been subject to soft budget constraints via “bailouts”,so that state-owned airlines may not be subject to a widened efficiency gap at higher competition levels in this industry.Funkhouser and MacAvoy study firms in a variety of industries in Indonesia, and compare their efficiencies by computing the ratio of each firm’s average costs to the appropriate industry average.Although they find no differences at the 5% level, private firms are significantly more efficient at the 10% level.Cullinane, Song, and Gray use a method that is increasingly popular in the recent literature to estimate cost efficiency: stochastic production frontier function estimation.Rather than looking at the cost of producing a unit of each output separately, or creating an index to evaluate the cost of all outputs simultaneously, the method establishes an efficient frontier of production using the data available, and evaluates each firm’s efficiency based on its distance from the frontier.The authors study 15 container ports in Asia, and find no significant differences in efficiency based on ownership.Of the 7 studies reviewed that study competitive environments, only 3 found that private firms were more efficient than state-owned firms.Of those 3, Vining and Boardman and Diboky both used measures of efficiency that are sensitive to revenue gains; it is unclear whether the measures used in Chen and Yeh are price-sensitive or not.As the evidence in Section 1.3.1 suggests, the efficiency of private firms may be overstated using price-sensitive measures, when markets are not highly competitive.Diboky and Chen and Yeh are similar in other respects.Both studies use Data Envelopment Analysis to estimate the technical efficiency of public and private firms that contemporaneously exist over the study period.Diboky studies results for 300 insurance firms in Germany that compete directly with each other; Chen and Yeh examine 34 domestic banks in Taiwan that face additional competition from 67 banks that are partially foreign-owned.Diboky measures firm “outputs”as gross premiums and net income, while Chen and Yeh measure quantities of loan services and portfolio investment.Chen and Yeh find that private banks outperform public banks; Diboky finds that public banks were substantially less efficient than either private or “mutual”banks of mixed public and private ownership.Vining and Boardman study a variety of industries whose four-firm concentration ratios vary from 14% to 43%, suggesting that the competitive environment in their study bordered on monopolistic competition, by the standards of this review.In such an environment, their use of efficiency metrics such as sales per employee and sales per asset may have caused private firms to appear more efficient than state-owned firms for reasons of higher prices, rather than lower unit costs.