Optimal mixed ownership: A contract view

This paper reconsiders the classic issue of whether provision of a public good should be undertaken directly by the government or through private contracting (Hart, Andrei, & Robert, 1997). We consider a third alternative of provision by a mixed ownership firm. We assume that this mixed ownership firm provides the government principal with a combination of the contracting problems it faces in the two more extreme alternatives. We show that full government ownership and provision is never optimal and that frequently the mixed firm undertakes intermediate investments that also prove welfare superior to fully private contracting. These results carry over to an extension in which the agent is presumed to be a foreigner.