Privatization in a Small Open Economy with Imperfect Competition
34 Pages Posted: 8 Jan 2009
Date Written: October 31, 2008
We look at privatization in a general equilibrium model of a small, tariff-distorted, open economy. There is a differentiated good produced by both private and public sector enterprises. A reduction in government production in order to cut losses from such production raises the returns to capital and increases the tariff revenue, which are welfare improving. However, privatization also leads to lower wages and possibly fewer private brands. This lowers workers' welfare, which may make privatization politically infeasible. Privatization can improve workers' welfare with complementary reforms, e.g., attracting foreign investment or trade liberalization.
Keywords: public sector enterprise, privatization, foreign investment, trade liberalization, monopolistic competition
JEL Classification: H41, F12, L32
Suggested Citation: Suggested Citation