Post on 21-Dec-2015
transcript
04/18/23 Production of Public and Private Goods
1
What about Public Goods?
Shyam Sunder, Yale University
Rethinking Capitalism
Bruce Initiative at the University of California at Santa Cruz
April 9, 2011
Rethinking Capitalism
• Even capitalist economies need public goods
• Estimates 30-40 percent of the total economy
• Private owners of capital have little incentive to provide public goods, and state and NGOs step in to fill the space
• The problem of organizing and managing efficient production of public vs. private goods
• Take a break from focus on more visible markets to look inside the organization at less visible elements
• Triumphalism: extending the private good model to production of public goods
04/18/23 Production of Public and Private Goods
2
04/18/23 Production of Public and Private Goods
4
Cries in the Wilderness
• Bolton: Don’t Put Government in a Strait Jacket
• Drebin: Is what is Good for General Motors Good for Detroit?
• Mautz: Should Government Emulate Business?
04/18/23 Production of Public and Private Goods
5
Compare Structure of Public and Private Good Organizations
• Private good organizations produce and sell goods for a price to customers
• Customers impose discipline on them by denial of revenue for unsatisfactory performance
• Shareholders control managers by offering them net income based compensation
04/18/23 Production of Public and Private Goods
6
Figure 1
Resource Flows in Private-Good Organization
Employees
Shareholders
Creditors
Customers
VendorsGovernment
Managers
04/18/23 Production of Public and Private Goods
7
Figure 1
Resource Flows in Private-Good Organization
Employees
Shareholders
Creditors
Customers
VendorsGovernment
Managers
Public
Goo
dsTax
es
Goo
ds a
nd
Serv
ices
Cas
h
Compensation
Skills
SkillsCompensation
Res
idua
lR
ight
s
Equ
ity C
apita
l
Interest
Loan
Capita
l
CashGoods and Services
04/18/23 Production of Public and Private Goods
8
Necessary Conditions
• 1) Individual Condition: Each participants expects to receive at least the opportunity cost of contributions he/she makes to the organization
• 2) Aggregate Condition: Contributions of all participants can produce enough output to meet the expectations of all
04/18/23 Production of Public and Private Goods
9
Public Good Organizations
• Public good organizations have beneficiaries, not customers
• Weaker or no customer discipline
• Efficient production of public goods is far more difficult challenge
• Solution to the problem of efficient production of public goods: bureaucracy
04/18/23 Production of Public and Private Goods
10
Figure 1
Resource Flows in Private-Good Organization
Employees
Shareholders
Creditors
Beneficiaries
VendorsGovernment
Managers
Public
Goo
dsTax
es
Goo
ds a
nd
Serv
ices
Cas
h
Compensation
Skills
SkillsCompensation
Fin
anci
alR
esou
rces
Interest
Loan
Capita
l
Goods and Services
04/18/23 Production of Public and Private Goods
11
Legitimate Reasons for Different Management Structure
• Efficient production of public goods is far more difficult
• Imposing business practices can cause considerable harm
• Bureaucracy is an efficient solution to a difficult problem
• Example: Besselman, Arora and Larkey Study of Defense Department on dysfunctional consequences of introducing business practices
04/18/23 Production of Public and Private Goods
12
Lack of Theory of Organizations to Produce Public Goods
• Management curricula linked to economics.• Absence of economic theory of public good
organizations• Economics and management courses
emphasize private goods only.• An example of a lack of theory driving out
teaching and practice
04/18/23 Production of Public and Private Goods
13
Four Characteristics of Bureaucracy
• Fixed wage
• Impersonal rules
• Tenure in job
• Promotion from inside
04/18/23 Production of Public and Private Goods
14
Special Problems in Control of Managers
• At the procedural hub of the contracts• Control resources, have information• Monitor and negotiate with others• Difficult to measure their contributions• Can appropriate resources and information• Misappropriation difficult to detect• Challenge: devising a scheme to induce managers
to contribute what is expected of her
04/18/23 Production of Public and Private Goods
15
Comparing Private and Public Good Organizations
• Resource flows
• Residual Claims
• Product Market Discipline
• Decision Making
– Product
– Investment
• Accounting and Control
04/18/23 Production of Public and Private Goods
16
Resource Flows
• Unreciprocated outflow to beneficiaries
• No quid pro quo
• Need unreciprocated inflow (tax, gifts)
• Capital versus revenue account cash flows
• In Public good organizations, capital flows are “revenue” contributions
04/18/23 Production of Public and Private Goods
17
Residual Claims
• An economizing device in private good organizations
• Reduce the number of contracting relationships
• Residual claimant given control (susceptible to others' non-performance)
• All agents can protect their interests directly
04/18/23 Production of Public and Private Goods
18
Stock Market Consequences of Residual Claims
• Trading in residual claims (stock market)
• Creates incentives to gather and produce information
• A large information industry exists
• Capitalizability of residual claims induces interest in shareholder monitoring the longer term resource flows
04/18/23 Production of Public and Private Goods
19
Public Goods Organizations
• No tradeable residual claims
• Weaker incentives to search for information
• Weaker concern for the longer run (e.g., Social Security; budget debates)
04/18/23 Production of Public and Private Goods
20
Defining Managers’ Contracts
• Private Good Organizations make it self-enforcing: link compensation to the residual (accounting and audit)
• No product market discipline No link of managerial compensation to residual
04/18/23 Production of Public and Private Goods
21
Product Market Discipline
• Customers of private good organizations negotiate terms
• No transaction if not satisfied• Customer can withhold revenue• Residual-based contract for
managers possible
04/18/23 Production of Public and Private Goods
22
Public Good Organizations’ Beneficiaries
• Cannot withhold resources directly
• Would continue to consume resources of poorer quality
• Highly indirect disciplinary mechanism (voting, delay, aggregate)
04/18/23 Production of Public and Private Goods
23
Private Good Contract in Public Good Organization
• Dysfunctional
• Simple for managers to maximize the residual by cutting the quality or quantity
• This makes the organization becomes redundant
• Efficient structure for private goods is not efficient for public goods
04/18/23 Production of Public and Private Goods
24
Redistribution of Decision Rights
• This Problem in public good organizations is addressed by redistribution of decision making responsibilities
• Managerial contract delinked from residual
04/18/23 Production of Public and Private Goods
25
Product Decision Rights
• Managers have information, expertise, and decision rights in private good
• In public goods, the governing body specifies what is produced, quantity, quality, and who gets them, because it pays for them
• Residual generation is irrelevant because the net residual is negative
04/18/23 Production of Public and Private Goods
26
Product Decision Rights in Public Good Organizations
• The informational advantage managers in private goods is left unused in public goods
• Managers not offered incentives to look for newer types of public goods
• They may yet do so to seek promotion and power, retain jobs
04/18/23 Production of Public and Private Goods
27
Investment/Production Decision Rights
• Managers choose residual maximizing quantity, quality using their information
• Delegation of quantity decisions possible through linkage between residual and remuneration
• Investment decisions are derived decisions from the quantity decisions
04/18/23 Production of Public and Private Goods
28
Investment/Production Decision Rights in Public Goods Orgs.
• In public goods, governing (financing) bodies make quantity and quality decisions,
• And therefore, they also make the capital investment decisions
04/18/23 Production of Public and Private Goods
29
Accounting and Controls
• Differences between internal control and financial reporting
• Differences often misinterpreted as prima facie evidence of poorly designed or poorly run public-good organizations
04/18/23 Production of Public and Private Goods
30
Accounting and Control Differences
• Entities• Funds• Consolidation• Assets/Depreciation• Revenue (cash versus accrual)• Budgets
04/18/23 Production of Public and Private Goods
40
Reversing Dependent and Independent Variables
• Legal charter and IRS rules on tax status => output and structure
• Economic characteristics of organization’s output => legal charter and the structure
04/18/23 Production of Public and Private Goods
41
Considered Polar Cases Only
• Pure public and pure private goods are two polar cases
• Most goods, and organizations that produce them lie in between
• Rich spectrum of opportunities for study of organizations, economics and accounting controls
04/18/23 Production of Public and Private Goods
42
Bureaucracy As A Dirty Word
• Bureaucracy is the oldest form of management
• Does not receive a fair shake in press
• Perhaps overused
• But it is necessary for many functions
• Lack of understanding leads to misguided attempts at reform that backfire
04/18/23 Production of Public and Private Goods
43
Unequal Race
• Efficient production of public goods is far more difficult than private goods (lack of customer discipline on managers)
• In enthusiasm for managerial organization for production of private goods, it is easy to be tempted to think that the same form of organization can be used for public goods
• Analysis tells us that it is not so
04/18/23 Production of Public and Private Goods
44
Thank You
• http://www.som.yale.edu/faculty/sunder/research.html
• shyam.sunder@yale.edu