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State owned firms: private debt, cost revelation and welfare

Author

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  • PICARD, Pierre

    (CREA, University of Luxembourg, Luxembourg; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

  • RUSLI, Ridwan D.

    (CREA, University of Luxembourg, Luxembourg)

Abstract

In this paper we study the role of private debt financing in disciplining a state owned firm operating for a government that incurs a cost of public financing. We show that debt contracts allow the government to avoid socially costly subsidies by letting unprofitable state- owned firms default. Debt is never used when the firm and government share the same information about the firm. By contrast, when the state-owned firm has private information, the government has an incentive to use debt to reduce the firm's information rents. We identify the conditions under which a positive debt level benefits governments. They depend on the cost of public funds, the interbank funding rate, the share of foreign investors, the level and uncertainty of the firm's cost.

Suggested Citation

  • PICARD, Pierre & RUSLI, Ridwan D., 2012. "State owned firms: private debt, cost revelation and welfare," LIDAM Discussion Papers CORE 2012047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2012047
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    Cited by:

    1. Wang, Cindy Shin-Huei & Bauwens, Luc & Hsiao, Cheng, 2013. "Forecasting a long memory process subject to structural breaks," Journal of Econometrics, Elsevier, vol. 177(2), pages 171-184.
    2. Pierre M. Picard & Ridwan D. Rusli, 2018. "State‐owned firms and private debt," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 20(5), pages 672-702, October.

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    More about this item

    Keywords

    state owned firms: private debt; cost revelation and welfare;

    JEL classification:

    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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