EXPLAINING PUBLIC VERSUS PRIVATE PARTITIONING OF THE ECONOMY Trivedi, Prajapati Indian Economic Journal; Oct 1, 1986; 34, 2; Periodicals Archive Online pg. 112 EXPLAINING PUBLIC VERSUS PRIVATE PARTITIONING OF THE ECONOMY By Prajapati Trivedi The property rights literature has long provided a theoretical justificati'on for the comparative efficiency of private enterprises over public enterprises (Alchian, 1961, 1965; Furburton and Pejovich, 1974). 1 The accumulated em- pirical evidence thus far would also seem to confirm the above assertion (Bor- cherding and Pommerehne, 1982, 1983; Davies, 1971, 1980; Bennett and Johnson 1979; Kennedy and Mehr, 1977; Rushing, 1974; Millward, 1982). 2 Therefore, economists have had to grapple with a question which was most recently restated by Baumol (1984): "If government enterprises do always suf- fer from an efficiency handicap, why should not all ecoonmic activities be left to the private sector?" A large body of literature has concerned itself with seeking an answer to this question. We can classify most of the approaches to it into four broad categories. 3 (a) Principal-Agent Analysis (or Transactions Approach): Accordin~ to this approach, when the government contracts-out the production of some goods to the private sector, it becomes the "principal," and the private enterprise the "agent". To ensure that the agent supplies the desired vector of goods and ser- vices, the principal has to undertake continuous monitoring. However, under certain circumstances, the inefficiency associated with public enterprises may be less than the cost of monitoring. In such cases, the rational solution is the creation of public enterprises. (Borcherding, 1983; Alchian Demsetz, 1972; Mc Manus, 1971, 1978; Williamson, 1975) (b) Political Economy Approach: There are several variants of this ap- proach. One group uses the political economy approach to show that the size and nature of the public sector in a country depends on the class interest on the dominant political group (Ahmad, 1982). They suggest that the capitalist class leaves to the government (with pleasure) those industries where the risks are larger, pay-offs are deferred and expected returns are low. Another group argues that public enterprises are created because they provide a discrete way to selectively redistribute income to the "politically" worthy groups. (Lidsay and Zacher, 1978; Lowi, 1979; Hartle, I 979). Finally, another major variant of the political economy approach can be found in works dealing with Copyright (c) 2008 ProQuest LLC Copyright (c) Indian Economic Association