Optimal ownership of public goods in the presence of transaction costs

- An NGO can make a non-contractible investment to provide a public good.
- Ex ante only ownership can be specified, since contracts are incomplete.
- Ex post efficiency requires reaching an agreement with the government.
- The NGO must incur transaction costs to reach the bargaining stage.
- Ownership by the government can be optimal even when the NGO has a larger valuation.

A non-governmental organization (NGO) can make a non-contractible investment to provide a public good. Only ownership can be specified ex ante, so ex post efficiency requires reaching an agreement with the government. Besley and Ghatak (2001) argue that the party with the larger valuation should be the owner. We show that when transaction costs have to be incurred before the bargaining stage can be reached, ownership by the government can be optimal even when the NGO has a larger valuation. Our finding also contrasts with the standard private-good setup where the investing party (i.e., the NGO) should always be the owner.