Property rights and the bureau: the issue of separation of ownership and control

The nature of property rights in the public sector just discussed suggests a separation of ownership and control along the lines of that in the for- profit corporation, with some important differences. Full ownership of a resource includes both residual rights and control rights. The complex structure of the for-profit corporate form of organization results in a situation where no one has full ownership rights. Shareholders, who are considered owners, may have legal residual rights; legal control rights to resources allocated within the corporation are delegated to corporate managers.

The questions I raise here concern how these rights may be defined with respect to a public sector bureau. Clearly, no one has full owner- ship rights. This is not due to the public nature of the organization issue, for this is also the case for the private for-profit corporation. In the public sector, the complex nature of the bureau results in the situa- tion where no one has full ownership rights. But for the public sector organization, unlike for the for-profit corporation, there is the question of who has the residual rights. Indeed, what does the concept of resid- ual rights mean in the context of the public sector? And in the public sector, who has the control rights?

These questions are by no means answered simply, and as the litera- ture on public sector organizations and resource allocation decisions shows, there is considerable controversy. Much of the literature that deals explicitly with the issue of public production of services invokes the implicit assumption that either there is no ownership, or that the ownership lies with the citizens who are so far removed from the pro- duction and decision processes that there is effectively no ownership. That is, there is no one individual or group to whom residual rights may accrue. In such a situation the separation of ownership (that is, holder of residual rights) from control in public sector organizations is essen- tially of an infinite degree.

In the preceding section I argue that ownership in the public sector can be defined. Further, I argue that ownership of public sector organi- zations can be conceived of in a way that permits analysis of bureau managerial decision making in much the same way that is possible for corporations. What I propose is that it is possible to define an individ- ual or group to whom residual rights of public sector production accrue. First, I consider citizens, or the taxpaying public, as consumers of pub- lic sector services rather than as owners of public sector organizations.

Second, I consider legislators as owners in the sense of residual claimants of public sector organizations for the following reasons. I con- ceive of legislators in the role of investors in the bureau. As I have pointed out, there are clearly differences between shareholders in a cor- poration and legislators as stakeholders in a bureau. The environment in which public sector organizations operate is not a purely economic one as exists for the for-profit corporation. The bureau’s environment is both economic and political. This results in legislators being in the role of stakeholders in bureau production activities. They appropriate funds to a bureau with the clear expectation of a return that generates economic and/or political benefits. Therefore, legislators make funding decisions for bureaus as stakeholders that are investment decisions much like those of corporate shareholders. In addition, legislators monitor bureau production activities. They incur monitoring costs to do so, through the opportunity cost of time devoted to monitoring activities and the direct cost of monitoring services. In the US, for example, Congress estab- lished the Congressional Budget Office (CBO) to establish independent estimates of program costs than can be used as part of legislators’ deci- sion process. The funds that are appropriated to the CBO are not avail- able for other public services for constituents or interests groups that could provide votes or contributions to legislators. That legislators are investing taxpayers’ funds rather than strictly their own is not of impor- tance here. This is so because the decision environment is a political one: the funding (investment) decision is a political decision and the expected return is a political return. I recognize, however, that the use of public funds rather than person funds may be a source of bias to the legislative decision process concerning bureau appropriations. I con- sider this point below.

As I noted above, the literature on public sector production through bureaus implicitly assigns an infinite degree of separation of ownership and control. In this literature the role of citizens is either minimal or absent, except as a source of political benefit to legislators. I first exam- ine some of the literature on public sector production, and then return to the issue of separation of ownership and control in the public sector.

Source: Carroll Kathleen A. (2004), Property Rights and Managerial Decisions in For-Profit, Nonprofit, and Public Organizations: Comparative Theory and Policy, Palgrave Macmillan; 2004th edition.

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