Ownership, efficiency, and political interference

Privatisation is often explained by a desire to achieve efficiency. Some authors propose that the main reason for inferior performance under public ownership is interference from politicians who promote output and employment instead of profits to please voters. Western state-owned firms however typically operate in imperfectly competitive markets, or even in natural monopolies. Private ownership then leads to underprovision. This paper presents conditions under which political interference yields higher welfare than under commercial objectives, and vice versa. If effort affects utility, interference may be beneficial in a seemingly perfect market.