Ownership Versus Bribery
The Davidson Institute Working Paper Series
Posted: 17 Oct 1997
Date Written: August 1997
This paper investigates how, government ownership can better enhance entrepreneurs' incentives to invest than private ownership. Bureaucracy creates opportunities for governments to extort entrepreneurs, as entrepreneurs make transfer payments to these governments in order to steer through bureaucracy. These transfer payments can be either made through bribery or through offering a government ownership rights. This paper compares two kinds of ownership: private ownership where the transfer is made only through bribery, and government ownership where the transfer is made through both ownership rights and bribery. There is a crucial difference between bribery and ownership rights: bribery amounts to a short-term contract and ownership rights amount to a long-term contract. Based on this distinction, this paper suggests two mechanisms showing that instead of private ownership, government ownership may better enhance entrepreneurs' incentives that are crucial to investments. It therefore predicts ownership structures that are in contrast to what the conventional literature on property rights would predict. It sheds lights on many of the newly emerged firms involving government ownership in transition economies, such as joint ventures and Chinese township and village enterprises.
JEL Classification: D72, L22, P30
Suggested Citation: Suggested Citation