State Owned Firms: Private Debt, Cost Revelation and Welfare

Pierre Picard and Ridwan Rusli

DEM Discussion Paper Series from Department of Economics at the University of 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.

Keywords: State-owned firms; privatization; debt; information asymmetry (search for similar items in EconPapers)
JEL-codes: G32 L33 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-cta and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: State owned firms: private debt, cost revelation and welfare (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:12-10

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