chapter  3
Theoretical Foundations for Privatization
ByGraeme A. Hodge
Pages 12

This chapter outlines some of the major theoretical models and conceptual frameworks underpinning privatization. Several distinct conceptual bases have been suggested as underpinning privatization reforms. The chapter focuses on two of the most cogent criticisms: Firstly, the behavioral assumptions adopted in the theory have serious flaws; and the second common criticism voiced against public choice theory concerns lack of empirical validation. In view of its theoretical, conceptual, and empirical shortcomings, public choice theory must be regarded as at best a partial and limited model for some areas of human behavior. The application of agency theory to government services may be subject to serious inaccuracies to the extent that these criticisms are true. The area of governance structures is a branch of transaction cost theory. The theory of property rights argues that private ownership of the assets of a company results in superior profitability and effectiveness. Measurement issues can also form an important intellectual foundation underpinning efficiency reforms.