Public ownership and political failure

We study public ownership from the perspective of political economics. A partly partisan government runs a state-owned …rm. The number of employees the government wants to hire depends both on economic conditions and on the preferences of the government, both unknown to the electorate. The government’s policy towards the stateowned …rm gives a signal of its preferences, and may thereby in‡uence the probability that the government is re-elected. As a result, the governance of the …rm becomes ine¢cient and static, in the sense that it does not react adequately to changing economic conditions.