Private Action in Public Interest: The Comparative Governance of Social Issues

We adopt a comparative institutional approach to examine the most efficient way of dealing with market failure. We develop a typology of market failures based on the extent of externalities and information asymmetries and define the distinct transaction costs associated with each type. We then consider the relative efficacy of alternate governance forms in dealing with these costs, arguing that enforcement costs are lowest under the state, assurance costs under collectives, and fiduciary costs under non-profits. Further, we argue that for-profits can help address problems of market failure that require either co-specialized business capabilities or the development of new solutions. These arguments combine to produce a mapping between different market failure situations and the optimal arrangement to deal with them, including various hybrid arrangements. Our study thus contributes to work in both public economics and business strategy by developing a holistic theory of how public-private interactions are best governed.