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Privatization and Investment: Crowding-out Effect vs Financial Diversification

Author

Listed:
  • Guillaume Girmens

    (EPEE, Université d’Evry-Val d’Essonne)

  • Michel Guillard

Abstract

In this paper, we study the effect of share issue privatization (SIP) on private investment and financial market under incomplete risk diversification. Risk neutrality and imperfect intertemporal substitutability make investment decreasing in privatization (crowding-out effect). Vice-versa with risk aversion and perfect intertemporal substitutability (diversification effect). Finally, with risk aversion and imperfect intertemporal substitutability, crowding-out effects are more than compensated by diversification effects if and only if risk aversion is sufficiently high (relatively, i.e. compared to the inverse of the elasticity of intertemporal substitution). We establish these results in the most favorable case for the dominance of the crowding-out effect, when the revenues of privatization are devoted to present public consumption.

Suggested Citation

  • Guillaume Girmens & Michel Guillard, 2002. "Privatization and Investment: Crowding-out Effect vs Financial Diversification," Documents de recherche 02-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:02-15
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    File URL: https://www.univ-evry.fr/fileadmin/mediatheque/ueve-institutionnel/03_Recherche/laboratoires/Epee/wp/02-15.pdf
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    References listed on IDEAS

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    1. Stefano Bosi & Guillaume Girmens & Michel Guillard, 2005. "Optimal Privatization Design and Financial Markets," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 799-826, December.
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    Cited by:

    1. Ramos-Murillo, Erick & Kronberger, Benedikt, 2007. "Poverty and Banking Exclusion in Mexico: How can remittances and technology contribute to improve access?," MPRA Paper 60495, University Library of Munich, Germany.
    2. Stefano Bosi & Guillaume Girmens & Michel Guillard, 2005. "Optimal Privatization Design and Financial Markets," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 799-826, December.

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    More about this item

    Keywords

    Crowding-out effect; Non-expected preferences; Privatization; Risk-sharing;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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