Lack of commitment to future privatization policies may lead to worst welfare outcome

Junichi Haraguchi and Toshihiro Matsumura

Economic Modelling, 2020, vol. 88, issue C, 181-187

Abstract: We investigate the welfare consequences of a lack of commitment to future privatization policies. The government implements a privatization policy after the competition structure is determined by the entry of private firms. We find that in an equilibrium, the government fully privatizes (nationalizes) a public firm if private firms expect that the government fully privatizes (nationalizes) the public firm. This is because an increase in the number of firms entering a market increases the government's incentive to privatize the public firm, which mitigates future competition and stimulates entries. The full-privatization equilibrium is the worst privatization policy among all possible (either equilibrium or non-equilibrium) privatization policies for welfare because it causes excessive market entry of private firms. Partial commitment of a minimal public ownership share may mitigate this problem.

Keywords: Optimal degree of privatization; Inefficient privatization policy; Profit-enhancing entry; Two polar equilibrium privatization policies (search for similar items in EconPapers)
JEL-codes: D43 H44 L33 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:88:y:2020:i:c:p:181-187

DOI: 10.1016/j.econmod.2019.09.020

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