A Positive Theory of Privatization

Journal of Applied Economics ( web site) 2000 III1-55
(RePEc:cem:jaecon:v:3:y:2000:n:1:p:1-55)

Abstract:

This paper presents a theory that explains the prevalence of different models of privatization across countries and across industries. First, it establishes the analytical framework for determining the impact of privatization on the value of a privatized firm, on aggregate social welfare, and on the relevant interest groups: taxpayers, consumers, employees, and private investors. Merging both the income distribution and the production efficiency aspects of the process, it identifies the government's principal decision variables, and presents the political tradeoffs faced by the government when carrying out privatization. Based on this framework, the paper offers an outline for testing the hypothesis that privatization introduces a Pareto-dominating mode of operation. Two fundamental laws of privatization define necessary and sufficient conditions for Pareto-dominance. Based on four economically sensible principal assumptions, the paper analyzes the government's behavior under alternative objective functions: maximization of taxpayer welfare, maximization of aggregate social welfare, and maximization of political support. The main result reveals that a vote-maximizing government sets the optimal value of its decision variables, depending on the characteristics of the political market. This result is illustrated through a cross-country and a cross-industry comparison.

Keywords: privatization, positive economics, political tradeoffs, Popular Capitalism, Nomenklatura Companies.
Pages: 1-55
Volume: III
Month: May
Year: 2000

Related papers by JEL classification:
D78 L51 P16 P31

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