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MASTER RECHERCHE

Stéphane Saussier

Saussier@univ-paris1.fr

« Théories Economiques de L’Entreprise  »

Séance 3 -

Application de l’analyse néo-institutionnelle à l’organisation des services publics

et Ouverture vers la formalisation

Slides disponibles : http://www.webssa.net

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Today

A.  Public services 1. Context in

France and Europe

2. Alternative arrangements

3. The specific case of PPPs: a Transaction cost analysis

B.  Toward other paradigms 1. Agency costs 2. Asymmetric

information 3. Property Rights

A-1. Context in Europe and France

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A-1. Context in Europe and France: A Need for Investments

•  In 1996, it was estimated that €400 billion would be needed by 2010 for the European Transport Network.

•  By 2003, little progress had been made and the investment need had increased. It was recognized that renewed efforts would be required to deliver the proposed investment in 65 300 km of roads, 78 000 km of rail, 330 airports, 270 international sea ports and 210 inland ports …

•  Such investments need have been reaffirmed during the March 2005 summit, …

•  Reaffirmed by late 2009 in the crisis context

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More generally, those statements do not only concern transport infrastructures

•  OECD 2009 « Water for everybody »

•  In France and UK: There is a need to increase investments (+ 20%) in order to maintain the quality of water services

•  In LDCs, the situation is more dramatic: 1.8 M children are dying each year because of no access to water

A-1. Context in Europe and France: A Need for Investments

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Needs to invest in infrastructures and public services in order to increase growth and

attractiveness but …

•  Infrastructure’s needs in Europe •  Investment needs in public services •  Investments, Infrastructures and growth in Europe but …

Financial constraints for States and local public authorities!

A-2. Alternative Arrangements for Public Services in France

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Needs to invest in infrastructures and public services in order to increase growth but …

•  Infrastructure’s needs in Europe •  Investment needs in public services •  Investments, Infrastructures and growth in Europe •  Financial constraints for States and local public authorities

Why can’t we let private companies pay for

and manage public services ? !

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Privatization

What limits?

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Why Public Firms? What Scope for government?

• A classical answer: Market Failures •  Externalities •  Public Goods • Natural Monopoly

• A questioning view: The Coase Theorem

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The Coase Theorem

  The way property rights are

distributed in an economy does not impact on the way this economy uses scarce resources … if there is no transaction costs.   An efficient set of inputs to production

and outputs from production will be chosen by agents regardless of how property rights over the inputs were assigned to the agents.

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Illustration of the Coase Theorem (like presented by Coase himself in 1959 at the Chicago research seminar)!

•  Consider a farmer whose property is near a rancher's land. •  The rancher thinks of adding one head on his property •  The rancher's cow tramples the farmer's corn. This new

head would cost to the farmer $200 per year (negative externality).

•  This new head would generate a profit of $150 per year to the rancher.

•  Coase's theorem would lead us to predict that, whatever property rights distribution, the final decision would be the same!

•  “I have spent all my professional life in the company of first-class scholars but only once have I encountered something like the sudden Archimedean revelation - as an observer” (Eureka!, Ch. 5, Stigler, 1988)

Georges Stigler (1911-1991)

Nobel Prize 1982

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Transaction costs.

•  “Coase theorem”: in the absence of transaction costs, rights end up in the hands of those who value them the most.

•  No gains from trade unexploited. •  Example: monopoly.

Ronald Coase

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Monopoly and transaction costs.

• Monopoly is not Pareto efficient.

MR

$/Q

Q/t

D=AR

MC=AC

Qc Qm

Pc

  Why? Pm

CS

PS DWL = DeadWeight Loss

  Let’s make a deal.

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Monopoly and transaction costs.

MR

$/Q

Q/t

D=AR

MC=AC

Qc Qm

Pc

Pm

  Consumers ask monopolist to produce at the competitive level Qc.   Consumers’s surplus

expands to APcB.

A

B

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Monopoly and transaction costs.

MR

$/Q

Q/t

D=AR

MC=AC

Qc

Pc

  all producer’s surplus,

  In exchange, consumers “bribe” the monopolist by transferring back:

  plus (say) half of the DWL.

  Now both are better off.

Ah, but transaction

costs!

Pm

Qm

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Needs to invest in infrastructures and public services in order to increase growth but …

•  Infrastructure’s needs in Europe •  Investment needs in public services •  Investments, Infrastructures and growth in Europe •  Financial constraints for States and local authorities

Public Private Partnerships (PPPs): !One ideal “hybrid” solution?!

“Let’s private companies pay for and

manage public services under the supervision of public authorities” !

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PPP and the franchise bidding solution (Demsetz 1968)

!!!

Choice of the Private Operator Through Franchise Bidding

Competition for the field

Contract renewal

Competition for the field

Service specification

Competition price

t

Competition in the field replaced by competition for the field

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The PPP solution

What limits?

A-3. The Specific Case of PPPs

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Transaction Cost Economics: The Economic Analysis of Partnerships

•  A Public Private Partnership is a Partnership – the third P is the most important one

•  The transaction cost theory is a theory of partnership

•  The main question is when is it possible or not to have contractual relationships on the market – the make or buy question

•  TCE is an Empirical success story •  Applies for public private and for private

private partnerships

Williamson O.E. U. of California Berkeley 1932 -

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PPP’s failures (1)

•  The difficulties to put firms in « competition for the field »

•  Price criteria does not always resume what is expected from the private operator

•  Price criteria might be complex (price vector instead of one single price)

•  Aggressive bids and then quality shading (see the Nasa example!)

•  “Winners’ curse” •  Collusion: ex: case of urban transport

in France (2005) – penalty 12M€ •  Corruption: anti-corruption law in

France in 1993

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Potential (imperfect) solutions

•  Bids formulated in terms of a constant revenue stream •  Viaduc de Millau case

•  Negotiation instead of competition!

$

Years

Construction Discounted Revenues

T0

A

Expected Traffic

Low Traffic

High Traffic

T1

Maximum length

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PPP’s failures (2) •  Difficulties to enforce (incomplete) contractual agreements

•  Disconnection between price and costs over time •  Penalties are difficult to apply •  Non-verifiable dimensions of the contract

•  Opportunistic behaviors might arise •  Efforts to evade or renegotiate the contract (Guasch 2004) •  Underinvestment (Bordeaux - Lyonnaise Case) •  Lower level of quality than promised (but not enforceable) •  Price increases •  Absence of responsiveness to consumer’s needs

•  Connected to the kind of PPPs contract – Concession vs. PFI – Jamie Oliver example vs. French highways and winter snow falls

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PPP’s failures (3)

• Long term contracts and refranchising are problematic

• Specific Investments ⇒ Long term contracts ⇒ Lack of bidding parity at franchise renewal (« Fundamental transformation »)

•  Water sector and urban transport in France: 90% of renewed contracts with the same firm!

Concessions are not a free lunch. A need for regulation?

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The new European Directive: Discussion through the Lense of TCE

A new Directive for concession contracts in Europe

•  To spend public funds efficiently •  Current lack of transparency

concerning awards •  No directive for « Service

Concessions » •  Often we observe direct award of

contract without any competition!– Risk of favoritism!– Corruption!

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Main Elements of the European Commission’s Proposal (December 2011)

Main (lawyers) idea : Let’s put in place rules of the game in order to foster competition and reduce public authorities’ discretionary power ☞  Compulsory publication of call for tenders ☞  Obligations for the selection and award of concessions

•  Objective criteria •  Weighted criteria when possible

☞ Pragmatic renegotiation rules •  No more change than 5% of the price of the initial

concession contract

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•  Is it a good strategy?

•  What a transaction cost analysis would suggest?

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Pour en savoir plus…

•  European School for New Institutional Economics •  http://www.esnie.org

•  International Society for New Institutional Economics •  http://www.isnie.org

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Main references •  Bajari P., McMillan R., Tadelis S., 2009, “Auctions versus Negotiations in Procurement: An

Empirical Analysis”, Journal of Law, Economics and Organization, Forthcoming. •  Engel E., Fisher R., Galetovic A., [2006], “Privatizing Highways in the United States”,

Review of Industrial Organization, 29, 27-53. •  Estache A., [2006], “PPI partnerships vs. PPI divorces in LDCs” Review of Industrial

Organization, 29, 3-26. •  Guasch J., 2004, Granting and Renegotiating Infrastructure Concessions: Doing it Right,

World Bank Institute. •  Laffont J-J. 2005 “Regulation and Development” Cambridge University Press. •  Levin J. and Tadelis S. 2009, Contracting for Government Services: Theory and Evidence

from U.S. Cities”, Journal of Industrial Economics, forthcoming. •  Spiller P. 2008, “An Institutional Theory of Public Contracts: Regulatory Implications”, NBER

Working Paper No. 14152. •  Williamson O.E., [1976], “Franchise Bidding for Natural Monopolies – In General and with

Respect to CATV”, Bell Journal of Economics, 7, 73-104. •  Masten S.E. & Saussier S. (2000) «Econometrics of Contracts : An Assessment of

Developments in the Empirical Literature of Contracting», Revue d’Economie Industrielle, 92, 215-237.

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B. Toward other Paradigms

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The agency theory: Separation of ownership and control.

• Big modern firms are not owner managed.

• Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (1932).

•  Separation of ownership and control. •  Managers “plunder” stockholders. •  There is a need to control managers Adolf A. Berle (1895-1971)

with John F. Kennedy

In 1929, 88 of the 200 biggest US firms are controlled by managers. 41 by owners. In 1963, 85% of the 200 biggest US firms are controlled by managers

•  This gives rise to agency problems…

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Agency costs: stocks •  Adam Smith, The Wealth of Nations (1776)

•  « The directors of such (joint-stock) companies, however, being the managers of other people's money rather than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company »

•  Karl Marx, le capital livre troisième, 1864-1875 •  « D'une manière générale, les sociétés par actions qui se développent

avec le système du crédit tendent de plus en plus à séparer cette fonction administrative d'avec la possession du capital [...] à côté du véritable manager apparaît une foule de conseils d'administration et de direction pour qui l'administration et la direction ne sont, en fait, que prétextes à spolier les actionnaires et à amasser les richesses »

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Positive Agency Theory.

Michael C. Jensen (1939-)

An agency relationship is a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf that involves delegating some decision making authority to the agent.

•  Divergence of interest between principal and agent.

•  This gives rise to agency costs (control and misalignment)

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Discretionary margin and the efficiency of the managerial firms.

• Owners and managers’ objectives are disconnected •  The manager needs to be controlled

•  Managers might use their private information in order to hide things to shareholders - he is the only one to have capabilities to know if his decisions are efficient or not!

•  Managers might have hidden actions that do not look for profit maximization!

•  Separation of ownership and control might generate non competitive American firms

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Separation of ownership and control.

Michael C. Jensen (1939-)

•  Agency costs of separation are small compared to increased capital supply.

•  Risk diversification benefits of passive ownership.

•  Modern corporation has mechanisms to reduce agency costs.

•  Stock market. •  Takeover market. •  Managerial labor market. •  Expert boards. •  …

•  Question still open when the comparison concerns private vs. public firms: Corporate Governance Issues

•  See Charreaux 1998, RFG

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Corporate Governance: a hot issue!

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« Best practice » guides all around the world

0

50

100

150

200

250

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

nombre de codes publiés

cumul

Nombre de codes publiés à travers le monde Source: European Corporate Governance Institute http://www.ecgi.org/codes/all_codes.php Date du 28/12/2009

•  Exemple de conflits d’intérêts entre actionnaires et managers : le cas Vivendi

•  Pertes de 13,6 milliards € en 2001 et 27milliards € en 2002 sous l’ère J.M. Messier / Appartement de 520 m² à New York

•  « Quatorze procédures de class action réunissant des actionnaires minoritaires ont été déposées contre le groupe de communication et de médias et ses anciens dirigeants… Selon les actionnaires minoritaires, Vivendi Universal a mené une stratégie d’acquisitions sans frein en publiant des états financiers trompeurs, contenant des résultats surévalués en vue de maintenir un cours de son action élevé, de conserver une notation de crédits favorables et avoir accès à des nouveaux financements », Le Monde Mars 2003

•  51 millions de dollars d'indemnités prévus au profit des actionnaires de Vivendi trompés par sa communication financière en 2000-2002 (entre 800 000 et 1 millions d’actionnaires concernés)

•  Le 7 décembre 2004, Jean-Marie Messier est condamné à une amende d'un million d'euros pour avoir « délibérément diffusé […] des informations inexactes et abusivement optimistes » alors qu'il dirigeait Vivendi Universal.

•  Le 21 janvier 2011, il est condamné à trois ans de prison avec sursis pour sa gestion du groupe

Incentive Misalignment: Example 1

•  Exemple de conflits d’intérêts entre actionnaires et managers : le cas Zacharias – Vinci

•  Entre en 1971 à la CGE et devient DG de la SGE (Soc. Gle d’Ent), filiale BTP de la CGE en 1991

•  Nommé par J2M PDG de la SGE en 1997. Le groupe est renommé groupe Vinci en 2000

•  Son salaire et les stock-options que lui octroient les assemblées générales d'actionnaires de Vinci en font rapidement le patron le mieux payé du CAC 40, avec une rémunération estimée à 250 millions d'euros en 6 ans

•  Après la prise de contrôle des Autoroutes du Sud de la France, A. Zacharias veut s'octroyer une prime de huit millions d'euros de success fee

Incentive Misalignment: Example 2

•  Exemple de conflits d’intérêts entre actionnaires et managers : le cas Zacharias – Vinci

•  Opposition de son DG (Xavier Huillard) •  Rachat d’une partie de Nexity afin de pouvoir

« remplacer » Huillard par Alain Dinin, PDG de Nexity

•  Conflit Ouvert et révélation : Les excès de Zacharias révélés par Huillard

•  250 millions d''euros de plus-values sur stock-options. •  3,6 millions d''euros de salaire en 2005. •  13 millions d''euros d''indemnités de fin de carrière. •  55 millions de provisions pour l''assurance d''une retraite à

vie correspondant à 50 % du dernier salaire. •  A. Zacharias propose la révocation de X Huillard au

Conseil d’Administration : 7 pour ; 9 contre. Il est contraint à la démission et demande 81 M€ d’indemnisations … depuis la Suisse. La justice tranche en sa défaveur (2009)

Incentive Misalignment: Example 2

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But …

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But … !

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A Global Theory

• Limits of the analysis •  A theoretical framework not clear enough

•  What are assumptions concerning economic actors? •  Where the managers’ discretionary margin comes from? •  Control costs ? Where do they come from ? •  Impact of property rights distribution ? •  A complex theory that do not try to simplify the real

world

• Simplified views: •  the Incentive Theory or Normative Agency Theory •  The incomplete contract theory

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Incentive Theory and Agency Theory

•  The normative agency theory (incentive theory) is directly inspired from the positive agency theory

•  Main idea - Manager’s discretionary margins are coming

from asymmetries of information •  Problems generated by such asymmetries are pervasive all

over society, not only at the shareholder - manager relationships level

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Incentive Theory

• Assumptions •  Rationality •  Risk •  Asymetric information

• Addressed questions: •  Incentives

•  within public and private firms, •  between firms •  and regulation issues

Jean-Jacques Laffont 1947-2004

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Incomplete Contract Theory or Property Right Theory

•  The incomplete contract theory is directly inspired from the transaction cost theory

•  Main idea – Problems associated with contracts are

coming from institutions outside of the contracting partners

•  The distribution of property rights do not directly change levels of incentives but indirectly through residual property rights distribution.

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Incomplete Contract Theory

• Assumptions: •  Rationality •  Risk •  Symmetric information

between contracting parties •  Asymetric information with

third parties • Questions addressed by the property rights theory

•  Make or buy issues •  Proper scope of governments

Oliver Hart Harvard U.

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Lectures

•  Pour la prochaine séance, lire •  J-J. Laffont, Etapes vers un Etat moderne », Rapport du

Conseil d’Analyse Economique, 2001. (En ligne sur http://www/webssa.net)

•  Pour la dernière séance, lire •  Fares M. et Saussier S. 2002, Contrats Incomplets et

Coûts de Transaction» Revue Française d’Economie, 2/3 (janvier), 193-230 (En ligne sur http://www/webssa.net)