When to Privatize? When to Nationalize? A Competition for Ownership Approach

22 Pages Posted: 27 Mar 2009

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2008

Abstract

Theories of privatization or nationalization typically compare the economic or political efficiency of private and state ownership, either in general, or for a list of specific goods and services. They aim at defining, once and for all, what an optimal allocation of ownership should be, i.e. the desirable scope of government in production. They do not explain changes in state and private ownership boundaries, nor their timing. Accordingly, they can hardly account for the two great reversals that shaped the past century, the post-WWII nationalizations being followed since the 1980s by a privatization wave. While the privatization movement has dramatically slowed down recently, even reverting again to nationalization in the wake of the current crisis, the fluctuating allocation of property rights over firms between private investors and the state still awaits for an explanation.

We model a competitive bidding for these rights in which the private investors value shareholders wealth, and the state values political survival, obtained through the transfer of the firm cash flow to various political clienteles. The investors who value the firm most get the rights of control, a privatization or a nationalization, according to which type of investor has the lowest cost of funds. Recent data on 15 years of privatization in 8 countries lend support to our theory.

Keywords: Privatization, Nationalization, Cost of Funds, Competition, Ownership

JEL Classification: H10, D20, G32

Suggested Citation

Rosa, Jean-Jacques and Perard, Edouard, When to Privatize? When to Nationalize? A Competition for Ownership Approach (December 15, 2008). Available at SSRN: https://ssrn.com/abstract=1369249 or http://dx.doi.org/10.2139/ssrn.1369249

Jean-Jacques Rosa (Contact Author)

Sciences Po Paris ( email )

3 avenue Ingres
Paris, 75016
France

Edouard Perard

Sciences Po Paris ( email )

27 rue Saint-Guillaume
Paris, 75007
France

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