Exit, Voice, and Portfolio Choice: Agency and Public Ownership*

This paper asks what constrains the relative efficiency of a maximally decentralized form of public ownership of capital. It locates the answer in the nondecentralizability of common ownership. Relative inefficiency in the allocation of investment funds is predicted because the ability to arrange a private portfolio gives rise to incentives to investigate investment alternatives and to monitor the disbursers of investment funds, and these incentives cannot be replicated in a system in which (political) voice is the sole mechanism for instilling financial and managerial accountability. Implications for the design of public ownership systems are discussed.