Olympics and incentives

The costs of the Olympic games have far exceeded initial official estimates, and private equity is growing in importance. These two facts are related.
One reason for the growth of private equity is that, in some (many?) cases, it's inefficient for companies to be owned by many small, dispersed shareholders.
Such shareholders often have little incentive to discipline management, because the costs of finding out what the firm is up to outweigh the benefits of better returns, most of which accrue to others; there's a classic problem of collective action. The upshot is that managers have little incentive to try hard, so they become sloppy. As Adam Smith said: "Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."
And this is where there's a parallel with government. The relationship of voters/tax-payers to government is like that of highly dispersed shareholders to management. We lack effective control over government, and ministers have little personal incentive to maximize efficiency. The upshot is that we get bad cost control of projects like the Olympics.
This analogy is not, of course, my own. John Stuart Mill made it back in 1859:

Look at the whole class of rulers, and ministers of state. The work they are entrusted with, is among the most interesting and exciting of all occupations; the personal share which they themselves reap of the national benefits or misfortunes which befall the state under their rule, is far from trifling, and the rewards and punishments which they may expect from public estimation are of the plain and palpable kind which are most keenly felt and most widely appreciated. Yet how rare a thing is it to find a statesman in whom mental indolence is not stronger than all these inducements. (Book I Ch9 para 16 here.)

Now, in the case of companies, there's a simple solution to this problem of inadequate control over management. Private equity concentrates shareholdings and imposes greater control over management, often by giving them higher-powered incentives.
But what's the analogous solution in government?

Comments

[sanbikinoriaon]

We're just going to have to buy the British government out and bring it into private ownership. Then we can strip of its assets, fire half the staff, load it with debt, and sell it back to the electorate at an enormous profit.

Now, all we need to do is raise the buyout capital...

[Mark Wadsworth]

Sanbikinorian, WE already OWN the British Government and all State assets, it belongs to us (the "people" or the "taxpayer" or the "voter") indirectly, there is no need for us to pay anything at all we would be doing is paying money to ourselves.

What you mean is we should wrest control over state assets and manage them better. Which is a bloody good idea.

[chris strange]

Private equity concentrates shareholdings and imposes greater control over management, often by giving them higher-powered incentives.

The direct analogy for taking a country out of public ownership and into private would probably be like how King Léopold II ran the Belgian Congo. Very cost effective at getting what he wanted out of it, but not so good for the natives.

Perhaps something analogous to a de-merger would be a better idea than private equity. The UK is too big to run effectively so lets spin off some of its functions and let it focus better, or split it up and therefore reduce the number of 'share holders'.

[dearieme]

Your arguments for private equity would apply too to family companies, I suppose. They could, in principle, get round the problem of an untalented generation by an enlightened policy on adoption.

[Marcin Tustin]

Charge likely lads and lasses for being adopted?

[Meh]

Of course, the reality is that private equity is growing less because of "agency issues" (so beloved of economists) and more because of structural changes in financial regulation and apparent changes in the interest rate environment.

[corneilius]

The timing of the Olympics Cost Over-run Announcement was a simple distraction from the Trident issue, a far more serious problem. For all of us, across the planet.

Seems it's ok for the UK to break the NPT in full view of the world, whilst Irans 'alleged' breaking of same treaty is reason to impose economic sanctions of the kind that killed 500,000 children in Iraq.

There's a great song, (even if I say so my self) called "Olympics and War" out there.

http://www.mp3.com.au/track.asp?id=105606

Spread the word....

[dearieme]

"The timing of the Olympics Cost Over-run Announcement was a simple distraction from the Trident issue": what, in the sense of suggesting that Trident is a bargain at only twice the Olympics?

[corneilius]

Hmmm.. Olympics will cost £9 billion, and last for two weeks. The infrastructure will be around for 25 years as current building practices indicate....and then more stuff will be built = more business for the builders...

Trident update will cost £76 billion, last for 15 years and then 100's of thousands of years to deal with the 'waste' products........

Both are a completer and utter waste of taxpayers money and energy - a wombat to be precise!

Waste of Money, Brains and Time!

[jjbondjr]

My first car was a Ford Geo. Thing was a piece of junk.
Got me to point A to B so I guess that's all that matters. my current car is a chevy silverado. I
was lucky to get a good [url=http://www.news.com/5208-1071_3-0.html?forumID=1&threadID=31450&messageID=313547 ]60 second auto quote[/url] on that sucker so I'm happy with it. My dream
car is a Lamborghini Galllardo. Anyone see the new Reventon? Anyway what's your story?

[ManBearPig]

Of course, the reality is that private equity is growing less because of "agency issues