Privatization, Free Riding, and Industry-Expanding Lobbying

Abstract:     
Critics of privatization have argued that privatization distorts the political system by giving private contractors an incentive to self-interestedly lobby for changes in the substantive law. This paper argues that this charge is not in general true when public-sector actors (for instance, a public-sector union) can also self-interestedly lobby for similar changes.

I show in a formal model that, where the effectiveness of political advocacy in favor of a reform depends on the total amount of political expenditures in support of that position, and where there is no collusion among private contractors and between public and private sectors, privatization decreases political advocacy if the total benefit of the public-sector actors exceeds that of any firm. If there is collusion among private contractors, privatization decreases political advocacy if the total benefit of the public-sector actors exceeds that of the private sector. If all actors collude, privatization decreases political advocacy if the per-unit benefit of the public-sector actors exceeds that of the private sector.

I extend the model to the cases where the effectiveness of political advocacy also depends on the amount of political expenditures by the opponents of the reform, where political expenditures can affect not only the probability of success of a reform but also its content, and where the effectiveness of political expenditures does not merely depend on the sum of all expenditures on a given side.

Keywords: privatization, political advocacy, lobbying, public sector, unions, collusion

JEL Classifications: D21,D43,H11,H41,J45,J51,K23,L11,L13,L21,L32,L33

Working Paper Series