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The Optimal Choice of Privatizing State-Owned Enterprises: A Political Economic Model

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  • Chen, Yan

Abstract

We study the choices of two types of maximizing Public Servants over how far to carry privatization of industries and in what order to privatize. Two stylizations of the Public Servant's objectives are considered, a Niskanen-style Bureaucrat who maximizes a surplus budget subject to the constraint of staying in office, and a Populist who maximizes popularity/consumer welfare subject to the constraint of a balanced budget. Other things being equal, the Bureaucrat will privatize the sector (firms) with the least market power and the largest subsidy first. The Populist will adopt the same policy, if the marginal costs of products in the private sectors are not too high with respect to the marginal utilities. If the marginal costs are too high, however, the Populist will privatize the sector with the largest market power first. We also show that privatization is easier and faster in less democratic societies. Copyright 1996 by Kluwer Academic Publishers
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Suggested Citation

  • Chen, Yan, 1992. "The Optimal Choice of Privatizing State-Owned Enterprises: A Political Economic Model," Working Papers 808, California Institute of Technology, Division of the Humanities and Social Sciences.
    • Handle: RePEc:clt:sswopa:808
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    Cited by:

    1. Rakhman, Fuad, 2018. "Can partially privatized SOEs outperform fully private firms? Evidence from Indonesia," Research in International Business and Finance, Elsevier, vol. 45(C), pages 285-292.

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