A Closer Look at the 1954–79 UK Labour Productivity Record
Chapter 1: Introduction
1.1 BACKGROUND The opinion that prevails in the debate about public enterprise is that public ownership has invariably been a cause of inefﬁciency and waste. Academic economists are generally more cautious in their pronouncements than politicians or journalists but the ﬁnal conclusions of most of them tended to point at the same direction. The framework within which most researchers tended to conceptualise the public versus private ownership question is that of the principal–agent theory.1 The theory recognises that in both public enterprises and in large private sector companies with diffused shareholdings there is a divorce between control and ownership. The objectives of their managers are typically expected to diverge from those of the companies’ shareholders or those of the voting public (the ultimate owners of the public ﬁrms). The managers have to be induced to actively pursue the interests of the public or private ﬁrms’ owners by suitable incentives contracts. Such contracts can rarely be optimal because there are information asymmetries between managers and owners. The latter cannot observe (or infer) the managers’ actions, their levels of effort or the contingencies the managers were faced with. Only the ex-post outcomes of the managers’ activities are observable by the owners. This state of affairs raises the issue of monitoring: incentives contracts must be supervised and a credible system of pressures and sanctions must be in place to ensure that the contract will be enforced. The differences in the systems of monitoring managerial performance arising out of the two types...