A Test of the Property-Rights Theory of the Firm: Water Utilities in the United States

Abstract

CONTROVERSY over the relative efficiency of public versus private enterprise has a long history in economic thought. Many of the same issues that concerned Chadwick and Mill in their debates in the 1850s over nationalizing certain British industries and von Mises and Hayek versus Lange and Lerner in their well-known exchanges about the efficacy of a centrally planned economy continue to come up in the literature.1 In fact the modern property rights theory of the firm, postulated by theorists such as Alchian, Becker, and Demsetz follows in the tradition of von Mises and Hayek in stressing the impact on economic efficiency of alternative ownership forms. Special emphasis is placed on cost-reward arrangements within private and public enterprises in this approach to the theory of the firm. Where a direct connection between productivity and reward is severed, as in public enterprises, production will be less economically efficient. While this is a very appealing approach to firm behavior, it is yet to be subjected to a rigorous test with respect to firm costs. De Alessi purports to examine the implication of the property rights theory for managerial tenure.2