Privatization, Partial State Ownership, and Competition

Abstract

In practice, governments in transition and other economies often retain some shares in privatized firms. For a two-firm differentiated-product oligopoly, we show how partial state ownership affects the firms' subsequent investment and output behavior. Hence, we determine how the optimum retained state ownership share depends on product-market competitiveness and we find the conditions under which it would be preferable to sell the firms to a single owner. Partial state ownership is optimal if the proportionate welfare weight on government revenue is high, but less than unity. As product-market competitiveness rises, investment is first increasing and then decreasing.

JEL Classification: L33, P21