67knowledge. Even if this “noise mechanism” does not work for all voters, what matters for a politician to be elected is the vote of the median voter (for a review of the median voter model and its implications, see, for instance, Congleton, 2004). Thus, assuming that half of the voting population is not capable of accurately inferring the (unobservable) (in)competence of politicians through the announced policies, it is rational for politicians to engage in manipulation. As shown by Murtinu et al. (2021), politicians “attempt to manipulate the inference on their ability through excessively loose platforms.” The incompetence of politicians thus leads to the implementation of (overly) expansionary policies, which materialize via a massive presence of politics in ﬁrms and in markets. Politicians can create uncertainty in markets for two reasons. First, frequently changed regulation makes it more difﬁcult for ﬁrms to estimate future returns, thus reducing investments. Second, politics in markets leads to ill-functioning markets for corporate control, which makes the matching between competent managers and ﬁrms less efﬁcient. For example, policy uncertainty, as measured by the Economic Policy Uncertainty Index,1 increased substantially after April 2020 as lockdowns, school and business closures, travel restrictions, and other new rules emerged at the start of the Covid-19 pandemic.

4 Government Incompetence in Markets and Firms

A further problem with an active state role in entrepreneurship and innovation is that a state’s interventions interfere with private ownership competence. First, by increasing uncertainty, they make it more difﬁcult for owners to exploit their governance, matching, and timing competences. Second, by interfering with market competition, they distort the process by which owners and their competence are matched with ﬁrms.

1http://policyuncertainty.com S. Murtinu et al.

68The theoretical premise of top-down innovation policies, which lie at the core of Mazzucato’s advocacy of the entrepreneurial state, is that imperfect markets fail, and only the state can provide a solution to such a failure. According to this argument, market failures mean R&D investments are too low because private players, knowing they cannot appropriate all the value they create, lack the incentives to invest “enough” in innovation (Klette et al., 2000). As Baumol (2002) noted, if these private actors are competing with each other, it only requires a few to stimulate substantial R&D investments. Moreover, who knows the optimal level? How is it possible to calculate the social optimum?

Especially under Knightian uncertainty, there are no answers to those questions. Thus, a policy change under Knightian uncertainty contributes to even more uncertainty for entrepreneurs, with negative backlashes for investments. Under Knightian uncertainty, the identiﬁcation of future scenarios is far from unanimous across market agents and comes from the exercise of entrepreneurial judgment. In these situations, centrally planned structures like the state are very inefﬁcient in collecting and processing the information necessary to appraise and assess proﬁt opportunities, new technologies, etc., and then in implementing effective policies. By contrast, it is competition in decentralized markets that makes knowledge available to innovative entrepreneurship (Hayek, 1945; Schumpeter, 1934).

An example of the inefﬁciency of top-down innovation approaches is provided by comparing the commercialization of university intellectual property in the United States and Sweden (Goldfarb & Henrekson, 2003). Sweden’s policies are typical of those in most European countries, depending on direct government action to create mechanisms for technology transfer that foster commercialization. The United States, by contrast, relies on a decentralized model in which academic institutions experiment and search for the best way to commercialize their research outputs. Goldfarb and Henrekson (2003) ﬁnd a noticeable lag in the commercialization of academic research in Sweden, suggesting the advantages of a decentralized approach. Besides possibly creating further uncertainty in already uncertain markets, political intervention in markets may make the market for corporate control less efﬁcient. Building on Alchian (1950) and Winter (1971), Pelikan (1989, p. 281) argues that the market for corporate control strongly inﬂuences the efﬁciency through which ﬁrms select managers and executives on the basis of their economic competence, deﬁned as “the competence to receive and use information for solving economic problems and taking economic decisions.” Economic competence is tacit (Polanyi, 1962) in the sense that it can be thought of as a form of informational capital or cognitive ability to use and process information, which is intrinsically attached to the manager. Economic competence is then not directly observable, and a ﬁrm’s owners need to use cues or signals (e.g., a manager’s background or previous performance) to select the most suitable manager. Thus, owners need to be competent to select an economically competent manager. Indeed, it is not (only) a matter of incentives: The same incentives given to two managers equally motivated to maximize the same utility function produce different outcomes on the basis of their different economic competence.

69The Entrepreneurial State: An Ownership Competence Perspective

A well-functioning market for corporate control—that is, a market in which ownership titles tend to ﬂow into the hands of owners and ownership groups with higher levels of ownership competence—can replace a lazy or incompetent manager, thus pushing managers to maximize a ﬁrm’s shareholder value because of the threat of takeover or replacement. Given that the economic competence of managers is a scarce resource in the market (Mackey et al., 2014; Pelikan, 1989), it is vital that the process through which managers are matched with ﬁrms is efﬁcient, so as to bring the economic system to a new conﬁguration characterized by a higher dynamic efﬁciency. The key question here is “is it the competence of private owners or the competence of the government that leads to the best matching between managers and ﬁrms, that is, the best matching between the economic competence of each manager in the market with the task required by each ﬁrm?” (Heiner, 1983).

Here we are not interested in the institutional features that hamper the most efﬁcient matching between ﬁrms and managers, such as government restrictions on private ownership and transferability of capital; by contrast, we theorize why government ownership is conducive to an inefﬁcient matching process. The focus is placed on government ownership because, at the ﬁrm level, political involvement often means that governments become owners targeting ﬁrms in need of equity capital. As suggested by Murtinu (2021, p. 280), in principle “government equity capital is more patient than private equity capital, and this is especially important in the context of technology ventures where private investors may look for short term gains, thus targeting only projects with shorter time horizons and closer to the market.” Hence government ownership has potential advantages for ﬁrms, such as the availability of short-term cash, which is necessary for investments and access to resources (Chen et al., 2007; Ferreira & Matos, 2008; Shleifer & Vishny, 1986). Another advantage is the possibility for political owners to convey information about future policy shifts (Murtinu, 2021) that may help the ﬁrm to better organize its production function and its strategies. However, government owners will typically not seek to maximize value (Shleifer & Vishny, 1994; Megginson & Netter, 2001) due to conﬂicts of interest (1) between owners, (2) between the government and government owners, and (3) between government owners and managers. First, government owners are typically politicians or agents placed by politicians that aim to pursue political goals in addition to, or sometimes in substitution of, economic goals. This may lead to horizontal agency costs, also called principal-principal conﬂicts (Colombo et al., 2014; Young et al., 2008), that is, conﬂicts between principals (private owners and government owners) who have different interests, preferences, and objectives (Connelly et al., 2010; Walsh & Seward, 1990). Second, political ownership may exert pressure (for instance, on the board of directors) to appoint managers who are not the most economically competent but who are politically aligned with the governmental agenda. This means that different from private owners, government owners prioritize the control of the appointed manager—for instance, via (tacit) promises of future appointments in other government-owned ﬁrms or entities—and not their competence; thus, government S. Murtinu et al.

70owners may be less likely than private owners to both give ownership rights to the appointed manager and select managers on the grounds of competence.

Finally, government owners are less capable than private owners of selecting competent managers for three main reasons, all of them related to contracts and individual talent. Let us take the example of a particular class of owners: (private and public) venture capitalists (VCs). First, public VCs are less capable than private VCs of incentivizing the appointed manager not to engage in perk consumption, empirebuilding strategies, and other non-value-maximizing behaviors. For instance, De Bettignies and Ross (2009, p. 358) argue that, “[p]rivate development can dominate