DP11632 Optimal Ownership of Public Goods in the Presence of Transaction Costs

Author(s): Daniel Müller, Patrick W. Schmitz
Publication Date: November 2016
Keyword(s): Bargaining, Incomplete Contracts, Property rights, Public Goods, transaction costs
JEL(s): C78, D23, D86, H41, L31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11632

A non-governmental organization (NGO) can make a non-contractible investment to provide a public good. Only ownership can be specified ex ante, so ex post efficiency requires reaching an agreement with the government. Besley and Ghatak (2001) argue that the party with the larger valuation should be the owner. We show that when transaction costs have to be incurred before the bargaining stage can be reached, ownership by the government can be optimal even when the NGO has a larger valuation. Our finding also contrasts with the standard private-good setup where the investing party (i.e., the NGO) should always be the owner.