Introducing the Legal Theory of State-Owned Enterprises

When a government regulates an enterprise, regulatory costs arise due to bounded rationality, uncertainty, and asset specificity. To preserve flexibility, regulators are sometimes granted discretion by law to respond to new circumstances. However, such discretion can be abused to expropriate the interests of private investors, especially when private investments become specific assets that cannot be easily used for other purposes. State ownership alleviates regulatory costs by aligning the interests of the government and the enterprises, although it incurs higher ownership costs. In sectors where regulatory costs are low, private enterprises prevail because of their advantages in reducing ownership costs. Conversely, in sectors where regulatory costs are high, state-owned enterprises (SOEs) are more likely to prevail and are not easy to privatize. The degree of regulatory costs depends on several factors, including the need for intense regulation in a particular sector, the degree of uncertainty, and the availability of alternative institutions that support effective regulation.