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Overcoming the Public-Sector Coordination Problem

CAMBRIDGE – Public-private cooperation or coordination is receiving considerable attention nowadays. A plethora of centers for the study of business and government relations have been created, and researchers have produced a large literature on the design, analysis, and evaluation of public-private partnerships. Even the World Economic Forum has been transformed into “an international organization for public-private cooperation.

Of course, private-private coordination has been the essence of economics for the past 250 years. While Adam Smith started us on the optimistic belief that an invisible hand would take care of most coordination issues, in the intervening period economists discovered all sorts of market failures, informational imperfections, and incentive problems, which have given rise to rules, regulations, and other forms of government and societal intervention. This year’s Nobel Prize in Economic Sciences was granted to Oliver Hart and Bengt Holmström for their contribution to understanding contracts, a fundamental device for private-private coordination.

But much less attention has been devoted to public-public coordination. This is surprising, because anyone who has worked in government knows that coordinating the public and private sectors to address a particular issue, while often complicated, is a cakewalk compared to the problem of herding the cats that constitute the panoply of government agencies.

The reason for this difficulty is the other side of Smith’s invisible hand. In the private sector, the market mechanism provides the elements of a self-organizing system, thanks to three interconnected structures: the price system, the profit motive, and capital markets. In the public sector, this mechanism is either non-existent or significantly different and less efficient.