ABSTRACT
The problems created by state ownership of business can be summarized as inefficiency and financial burden to the state. It is useful to examine the causes and economic consequences of such inefficiency. First, the causes of SOE inefficiency are quite complex and are related to the lack of appropriate incentives and to the multitude of objectives and constraints. Decision makers in SOEs include politicians, bureaucrats and technocrats. Their objectives are imposed by political agendas, by management and technical considerations, and by private interests. Goals of employment, output and profit maximization may coexist with social objectives such as the supply of water or electricity at low cost. This ambiguity in the priority of objectives leads to distorted incentives, reduces managerial effort and increases transaction costs.
