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PRIVATISING NATIONAL OIL COMPANIES: ASSESSING THE IMPACT ON FIRM PERFORMANCE - page 4 / 30

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II. Literature review

Neither the theoretical nor empirical literature have so far been able to provide

conclusive evidence as to whether state or private ownership are inherently superior in

promoting economic efficiency, and/or whether privatisation is an appropriate tool to

improve firm performance and efficiency.

Most theorists would argue that, under the conditions of competitive markets and

the absence of other market failures, privately owned companies tend to be more

efficient and more profitable than their state-owned counterparts. But because such

restrictive conditions rarely hold in reality, Stiglitz (2007) reminds us that the

theoretical argument becomes much less clear. Classic economic theories often cited

to explain differences between the two types of ownership include agency (Jensen and

Meckling 1976; Fama 1980), property rights (Alchian 1965) and public choice theory

(Tullock 1965; Niskanen 1971), but none of these provide unequivocal support to

either side of the argument. Having analysed the efficiency tradeoffs between

government and private ownership, Laffont and Tirole (1993) thus conclude that

theory on its own is unlikely to yield decisive insights.4

On the empirical side, reviewers have found well in excess of a hundred relevant

studies5, which can broadly be grouped into two major research designs: cross-

sectional studies of ownership effects on the one hand, and longitudinal studies of

privatisation effects on the other. As Villalonga (2000) points out, inherent static

superiority of private ownership is a necessary conditions for the success of

privatisation, but not a sufficient one, since privatisation processes are dynamic and

potentially include important changes other than ownership, such as political,

4 5

Comprehensive theoretical reviews can be found e.g. in Megginson (2005) and Pollitt (1995). The empirical evidence has been reviewed e.g. in Megginson and Netter (2001).

4

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