Public Ownership in the American City

Abstract

American local governments own and manage a wide portfolio of enterprises, including gas and electricity companies, water systems, subways, bus systems and schools. Existing theories of public ownership, including the presence of natural monopolies, can explain much of the observed municipal ownership. However, the history of America’s cities suggests that support for public ownership came from corruption then associated with private ownership of utilities and public transportation. Private firms that either buy or sell to the government will have a strong incentive to bribe government officials to get lower input prices or higher output prices. Because municipal ownership dulls the incentives of the manager and decreases the firm’s available cash, public firms may lead to less corruption. Public ownership is also predicted to create inefficiency and excessively large government payrolls.