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Mixed duopoly, privatization and the shadow cost of public funds

Carlo Capuano () and Giuseppe De Feo ()

No 2008015, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

Abstract: The purpose of this paper is to investigate the effect of privatization in a mixed duopoly, where a private firm complete in quantities with a welfare-maximizing public firm. We consider two inefficiencies of the public sector : a possible cost inefficiency and an allocative inefficiency due to the distortionary effect of taxation (shadow cost of public funds). Furthermore, we analyze the effect of privatization on the timing of competition by endogenezing the determiantion of simultaneous (Nash-Cournot) versus sequential (Stackelberg) games using the model developed by Hamilton and Slutsky (1990). The latter is especially relevant for the analysis of privatization, given that results and policy prescription emerged in the literature crucially rely on the type of competition assumed. We show that privatization has generally the effect of shifting from Stackelberg to Cournot equilibrium and that, absent efficiency gains privatization never increases welfare. Moreover, even when large efficiency gains are realized, an inefficient public firm may be preferred.

Keywords: mixed oligopoly; privatization; endogenous timing; distortionary taxes (search for similar items in EconPapers)
JEL-codes: H2 H42 L13 L32 L33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-pub
Date: 2008-04-01
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