INTRODUCTION
There is a wide consensus nowadays that most economic activities arc best undertaken
in a market environment with private property. It is generally accepted that only the
protection of private property rights and competition by rival firms provide adequate
incentives to perform.2
This general belief has led to a worldwide wave of privatization. The striking success
of some of the early privatization programs has also reinforced economists* beliefs in the
overall virtues of the market system and private property.
Most proponents of privatization believe that ,ithe market" and ’’private property’ go
hand in hand, but if for some reason production does not take place in privately owned
firms it is still preferable to organize the allocation of goods and factors of production
around some market system. Such a market sj∙stem would work better than a centrally
planned system but not as well as a market system organized around privately owned
firms. This is. in a nutshell the consensus view of today.
However, it is not obvious a priori why private property is essential for the well func-
tioning of markets, or how it matters. From a theoretical perspective at least, it is not
clear that ownership matters at all when there is sufficient competition in the market.
Another important consideration is that private ownership can take man}- different forms.
A firm tna}∙ be owned by dispersed outside shareholders, or by a single outside owner. It
may be owned by employees, as in partnerships and producer coops. Or it may be owned
by customers, as is the case of consumer coops, joint ventures, of some types of service
companies, and of firms producing intermediate products. This diversity of arrangements
suggests that the question may be not so much whether private ownership is essential
than what type of ownership is adequate, customer, employee or outside ownership?
This paper provides a theoretical analysis of the interaction between managerial com-
petition and ownership of firms taking the incomplete contracting perspective pioneered
by Grossman. Hart, and Moore (see Grossman and Han (1986). Han and Moore (1990).
and Han (1995)). It asks who should own the firm: customers, employees or outside
owners and how the efficiency of any of these ownership allocations depends on the extent
of competition in managerial labor markets. While we are accustomed to thinking of
2However. we share the view that identification of privatization with competition is misleading (Hart.
Shleifer and Vishny (1997))