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This paper develops a model of government policy toward industrial control and regulation that sheds light on the determinants of differential country experiences in terms of organizational arrangement and enterprise performance. In contrast to the model developed by Shleifer and Vishny [Shleifer, A., Vishny, R.W., 1994. 'Politicians and Firms,' Quarterly Journal of Economics, 109, 995-1025; Shleifer, A., Vishny, R.W., 1998. The Grabbing Hand: Government Pathologies and Their Cures. Harvard Univ. Press, Cambridge, MA], which suggests that government controls over firms come about when politicians can use public funds to buyoff the managers and solicit their cooperation in politically motivated redistribution of rents, the present shows that it may be the ability to use the government's regulatory powers at discretion that encourages politicians to impose controls on firms and redistribute their rents. The model implies that the politicians' appetite for intervention tends to be greater when the cost of collecting and using public funds is higher, which is the opposite of what the Shleifer-Vishny model predicts. The present model helps explain the puzzling observation that countries with poor institutions are more likely to impose extensive controls on production and maintain large and inefficient public sectors. The model also sheds light on a variety of other stylized facts and puzzles and offers new hypotheses to be tested.

We empirically examine interaction between the public and private sectors in pharmaceutical research using qualitative data on the drug discovery process and quantitative data on the incidence of coauthorship between public and private institutions. We find evidence of significant reciprocal interaction, and reject a simple 'linear' dichotomous model in which the public sector performs basic research and the private sector exploits it. Linkages to the public sector differ across firms, reflecting variation in internal incentives and policy choices, and the nature of these linkages correlates with their research performance.

Despite positive evidence of progress, when compared with the private sector, governments still have a long way to go. There is an urgent need to improve quality in all functions [...]