65organization or economic system is who the owners should be.

The decision of whom to allocate ownership translates, as theorized by Foss et al. (2021), into a decision about who is most competent at figuring out (1) which resources to own (matching competence), (2) how to own them (governance competence), and (3) when to own them (timing competence). These arguments are particularly important under Knightian uncertainty, when it is impossible to decide in advance how resources will be allocated under various contingencies. When the future is known (or predictable), parties can write detailed contracts that specify actions and responsibilities under different circumstances. Under uncertainty, these decisions must be made after the fact, and someone has to make them. Ownership can thus be defined as the right to make decisions about the uses of resources in S. Murtinu et al.

66conditions not specified by prior agreement, what Hart (1995) calls “residual rights of control.” This understanding of ownership has led to a flourishing of theoretical and empirical work on how firms are organized and contracts are written. A key claim is the idea that, to maximize value creation, ownership rights should be assigned to those parties whose marginal effort has the greatest influence on a project’s positive outcome (Grossman & Hart, 1986; Hart & Moore, 1990). This provides an explanation, not only for vertical integration or horizontal consolidation of production, but for which individuals or groups should own the joint production process. However, following Foss et al. (2021), we argue that the property-rights approach to the firm can be expanded by considering not only the incentives of various parties to use their ownership rights to create value, but their competence in doing so—which the Grossman-Hart-Moore approach assumes to be the same for everyone.

Are government bureaucrats or elected officials likely to be competent owners? Government actors face Knightian uncertainty and unforeseen contingencies as much as private actors (and can create Knightian uncertainty for the latter in the form of erratic economic policies; Higgs, 1997). In the next section, we shift the above arguments from the corporate world to politics and look at the interaction of ownership competence in politics with markets and businesses. As Pelikan (1989, 1993) points out, the process by which ownership is matched with ownership competence—in a market economy, via competition in product and factor markets and by the market for corporate control—is a critical issue in overall societal organization. How do political processes, democratic or otherwise, allocate ownership and control of productive assets to particular individuals and groups? In democratic systems, public agencies and state-owned enterprises are run by elected officials, civil servants, or bureaucrats appointed by elected officials. As Klein et al. (2010) point out, these government actors are not literal owners, but stewards of resources in principle owned by citizens or taxpayers. For simplicity, we focus on elected politicians and their staff and political appointees.

How are politicians selected, and according to what criteria? The behavioral political science literature observes that “the people who are called upon to make reasoned choices may not be capable of doing so” (Lupia & McCubbins, 1998): Simply put, politicians are often incompetent and not up to the tasks to which have been appointed. Moreover, voters face information asymmetries when judging the competence of politicians (Martinelli, 2001). Thus, incompetent politicians can manipulate such asymmetries and sell themselves to voters as talented and capable with respect to, for example, administering the public budget. This manipulation can get those politicians into office. For instance, politicians may announce a loose fiscal policy, which is financially unsustainable in the long run. However, being that most voters do not allegedly understand inter-temporal budget constraints, incompetent politicians can convince those voters about their ability—which is poor but sold to voters as high—to implement loose fiscal policies and, at the same time, assure budget sustainability to future generations. This lie cannot be captured by voters The Entrepreneurial State: An Ownership Competence Perspective

67because of the above information asymmetries (Rogoff & Siebert, 1988; Rogoff, 1990). The above arguments do not hold for all voters. Certain voters are endowed with better individual cognitive abilities and are then better equipped than others to collect and process information on proposed policies, thus inferring more precisely the competence of politicians (which is never fully observable). The announced policies represent a signal through which politicians aim to oversell their abilities in a specific policy domain. This signal is surrounded with noise, which is larger for voters with lower cognitive abilities. Thus, politicians can exploit and shape such noise to manipulate (certain) voters’ beliefs about their competencies.

For example, in the case of fiscal policies, Murtinu et al. (2021), inspired by the financial literacy literature (Lusardi & Mitchell, 2014; Fornero & Lo Prete, 2019), suggest that the relevant cognitive ability is the voter’s mastery of economic