Economics of State-Owned Enterprises

State-owned enterprises (SOEs) account for a substantial proportion of gross domestic product, employment, and assets in many countries. Based on a review of the theory and empirical evidence, we develop a novel five-step framework that can guide policymakers and economic advisors in making decisions about maintaining and/or creating SOEs. The framework suggests that the use of SOEs should be limited to circumstances in which a market failure exists, less invasive forms of intervention such as regulation/taxes/subsidies and private-sector contracting are ineffective or not possible, and the welfare loss of the market failure exceeds the costs, distortions, and inefficiencies of SOEs.