The authors report that the US government had no intentions for the firms other than as investors, and intended from the beginning to sell off the firms.Because subsidies and other soft budget constraints were not applied to these firms, and firm ownership was perceived to be transferrable, efficiency differences between ownership types were likely diminished relative to other cases in competitive markets.The authors further argue that the state-owned firms were monitored using mechanisms comparable to those in the private sector firms comprising their comparison group, reducing any agency issues that may have already been mitigated by the competitive markets within which the firms operated.Isik and Hassan are unique in being the only study to report that public firms were more efficient than private firms.The authors use measures of cost and technical efficiency to evaluate ownership effects among Turkish banks, and use non-traditional outputs to construct their measures, such as the number of letters of guarantee issued, and the number of loan commitments provided, thereby avoiding price sensitive data in their calculations.A broad overview of the empirical literature across the spectrum of competitive environments suggests that ownership differences appear to diminish in more highly competitive environments.Detailed examination reveals complexities that both sharpen this result, and provide a more nuanced understanding of the theoretical issues that drive efficiency differences between ownership types.Boylaud and Nicoletti provide an example of how, because privatizations may be announced at one time and executed at another time, some “ownership”effects may occur prior to actual ownership.Additionally, a closer look at Wallsten shows that price regulation common in monopolies can create effects similar to competition, so that firms existing in a non-competitive environment can display some of the efficiency characteristics of competitive firms.
While both of these studies find no efficiency effects to ownership alone, they each provide evidence that the entire process of privatization provides efficiency benefits,hydroponic gutter some of which occur prior to the the ownership transfer and after typical regulations are applied.In competitive environments, although 3 of the 7 studies reviewed find that private firms outperform state-owned firms, none of the 3 studies that avoided price-sensitive measures found this result.While this is by no means conclusive, it may suggest that this study’s criteria for competitive environments are not so stringent as to prevent a certain amount of price-setting behavior, so that price-sensitive measures of efficiency in this environment could reflect revenue increases.Accounting for these details strengthens the evidence that increased competition reduces efficiency differences between public and private ownership.According to theory, this implies that, as competition increases, reductions in agency issues have a positive effect on the relative efficiency of state-owned firms that dominates the negative effect from increasing reliance on soft budget constraints.However, the evidence suggests that this may be true only because soft budget constraints are not increasingly relied upon as competition increases, rather than because their effects are insignificant.Amongst non-competitive firms, there is evidence of soft budget constraints in 3 of the 7 studies; in competitive firms, none report any evidence of soft budget constraints.The reason for this deviation from theoretical expectations may be the prevalence of price regulations among monopolies in our sample of studies, which compel both private and public firms to supply at prices and quantities that might otherwise be found at much higher levels of competition.When assessing whether private or public firm ownership is more beneficial to society, the consensus has shifted over time.In the early and mid-20th century, both theoreticians and policymakers emphasized the potential for social losses in privatized markets due to market failures such as monopolistic pricing and externalities, and saw state ownership as a cure for these problems.In the last few decades, the argument that private firms are more innovative and efficient has held sway.Moreover, the theoretical foundations for state ownership have been weakened by the notion that regulation can solve market failures and achieve any distributional goals of the state by controlling the undesirable actions of private firms, while still allowing them sufficient freedom to innovate.However, unless policymakers can fully anticipate the behaviors of private firms, regulations may alter incentives for profit maximization in ways that lead to unintended consequences.In this paper, I study how private and state-owned sugar mills differentially affect the outcomes of farmers who grow both sugar cane and other crops, in Tamil Nadu, India.
Because the activities of sugar mills are highly monitored and regulated within the market for sugar cane, I posit that private sugar mills may pursue profits through less-regulated channels, such as discouraging substitute activities for their vendors by making it less profitable to grow other crops.In the setting of this study, private firms have both a motive and a potential means to affect the profitability of substitute activities.Sugar mills have high returns to scale, and benefit from increasing the quantity of raw sugar cane they receive from farmers.In addition, a regulatory system in the state assigns a zone to each sugar mill, within which it has exclusive rights to purchase sugar cane from farmers, and outside of which it cannot purchase sugar cane.While the zoning system is intended to provide an incentive for mills to increase the productivity of existing sugar cane farmers within its zone3 , it also increases incentives for mills to discourage farmers in their zones from growing other crops in lieu of sugar cane.Because private mills typically have relationships with large agricultural conglomerates that supply inputs to crops other than sugar cane, they may plausibly act on these incentives by influencing the costs or availability of inputs to grow other crops.Tamil Nadu’s zoning system not only provides a case study of how private firms react to regulatory constraints differently from state-owned firms; it also serves as the source of identification in this paper.By studying households who grow crops near the borders between state-owned and private mill zones, I am able to compare the effects of public and private mills on farmers who otherwise exist in the same geographic and policy environments.I employ a regression discontinuity design to identify outcome differences that occur at the border, and test soil quality and other determinants of farming outcomes to verify that borders are not endogenously placed.I find that crops other than sugar cane have substantially higher costs and lower profits in private zones than in state-owned zones, although sugar cane outcomes are not significantly affected by sugar mill ownership differences.My findings suggest that private sugar mills discourage farmers from pursuing substitute activities to growing sugar cane, in order to increase the supply of inputs to mills.Only a handful of papers examine the differential impacts of private and state-owned firms empirically, perhaps because of the difficulty of finding settings in which ownership effects can be identified.Frydman et al find that private firms are associated with higher employment levels, using data on state and privatized firms across transitional economies in Central Europe.Duggan studies private for-profit, private not-for-profit, and state-owned hospitals, and finds no difference in low-income patient health outcomes between ownership types.
The closest study to this paper is conducted by Mullainathan and Sukhtankar , who study how public and private sugar mills differentially impact sugar cane growers using the same identification strategy, and find small consumption gains among sugar cane growers who sell to private mills.However, none of these studies examine the effects of ownership differences on other related markets, and thus potentially overlook impacts resulting from private firms’ attempts to avoid regulatory scrutiny.This paper makes a unique contribution to the literature by examining the differential effects of state-owned and private firms on substitute markets for their vendors,U planting gutter and finds evidence that ownership structure can, indeed, have large impacts on vendors in these markets.This suggests that papers studying the effects of ownership on the economy may neglect important outcomes by constraining their analysis to the market of treatment.The study also employs an unusually clean identification of public and private ownership effects, as it compares the effects of publicly- and privately-owned firms on farmers who grow crops in otherwise similar environments, but must sell sugar cane only to a state-owned or private mill, respectively.In addition, the paper examines the consequences of a zoning policy common in India and other developing countries, and presents findings that broadly demonstrate how private firms might respond differently to regulations than state-owned firms.Lastly, the survey conducted to gather data for this paper contributes a novel dataset of farmer characteristics, growing practices, crop choices, and outcomes in rural India.The paper proceeds as follows: In Section 2.2, I discuss relevant theoretical differences between state-owned and private enterprises, and how they affect predicted outcomes in related markets.I also provide contextual information about farming in Tamil Nadu, and about sugar cane in particular.In Section 2.3, I describe my data and the regression discontinuity design I use for identification, along with identification concerns and how I address them.Section 2.4 discusses my analysis and results, and provides some explanations for what I find.To answer this question, I begin with a discussion of theoretical differences between private and state owned firms.It is commonly held that the goal of private firms is the maximal attainment of profits, while state-owned firms may have a variety of bottom lines, such as maximizing total gains to society, redistributing wealth amongst their stakeholders, or providing services that would not otherwise be provided by private enterprise.The arguments for state-owned firms are as varied as their potential goals: they may be intended to reduce social losses due to market failures, to promote social values, or to provide services deemed essential that may otherwise be neglected by the private sector.
However, these arguments – along with the distinction between private and state-owned firms – are dimmed somewhat by the ability of governments to regulate industries.If governments are able to perfectly specify their goals in contracts or regulations, then private firms that abide by their stipulations would fulfill any goals that state-owned firms are intended to accomplish.In practice, contracts and regulations may be incomplete, if governments cannot anticipate exactly what they wish to accomplish, or cannot completely specify how a firm must achieve these goals.Grossman, Hart, and Moore develop a theory of incomplete contracts that observes that the gaps in an incompletely specified contract allow firms the flexibility to make decisions that serve their own ends.Analogously, incomplete regulations give leeway to firms wherever laws do not specify how they must conduct business.These observations can be adapted to provide a more nuanced distinction between public and private sector firms in a regulated environment: While private firms are free to pursue profit maximization wherever regulations or government contracts do not specify how they must behave, state-owned firms can be thought of as completely regulated, and thus forced to act narrowly within the expectations of the government.Then, the difference between private and state-owned firms is the scope of activities that each can undertake to maximize profits, while fulfilling the regulatory obligations imposed upon it by a government.While this flexibility afforded to private firms can encourage innovation and efficiency, it may also lead to outcomes that were not envisioned by the government.In particular, since firms can profit from influencing related markets such as the substitute markets for their vendors, private firms may respond to regulations that constrain their within-market operations by increasing their activities in related markets, if they are less regulated.Scientists and policy makers in the international community, in both developing and developed countries, recognize the importance that agricultural technology and its extension has played in promoting the expansion of supply and increased productivity in the world over the past 30 years.Rosegrant and Evenson have documented the importance of new varieties and extension effort on Indian total factor productivity.Pingali, Hussein, and Gerpacio review the contributions made by the Green Revolution in South and Southeast Asia.Although Rozelle, Huang and Rosegrant, Fan and Pardey, and Lin measure the impact of agricultural research investment on China’s agricultural output, no one has systematically analyzed the determinants of total factor productivity.Understanding the process of technological impact on the productivity of food production in developing world’s largest country is important, since it is the main engine of production growth and increases in income from farming in countries after they have modernized their economies Past analyses, however, mostly have two shortcomings, both of which have limited the ability to closely investigate the way technology affects productivity.First, researchers typically have focused on supply or yield response or production function analysis and have not examined the impact on total factor productivity and, with the exception of Rosegrant and Evenson, the analysis has been highly aggregated, across states or provinces and especially across crops.Second, the research methods and measures of technological inputs also have limited the explanatory power of research analyzing the impact of research and extension investment.