ABSTRACT
The wave of privatization in both developed and developing countries initiated a number of research projects which focused on the analysis of performance of public and private enterprises using the criterion of productive efficiency. The theoretical arguments which explain the relatively poor performance of public enterprises compared to their private counterparts based their approach on the incentive and monitoring structures faced by their respective managers. In their study, Domberger and Piggott (1986) claim that the incentives and the constraints provided by the market promote productive and technical efficiency in the private sector whereas the public sector may face a different set of incentive structures which may not be compatible with the pursuit of efficiency in production. A related argument is presented in the property rights literature which ties the inherent efficiency differences to the very nature of the ownership structure and its effects on monitoring the managers. In his pioneering work Alchian (1965) argues that while the broadly dispersed and non-transferable ownership rights of public enterprises reduces the incentive of the public owners (voters or taxpayers) to monitor the performance of the public sector manager, the more concentrated and transferable ownership structure of the private sector generates incentives for shareholders to monitor managerial performance.
