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

Abstract

We model the fluctuating allocation of property rights in firms between private investors and the state, as the outcome of a competitive bidding for ownership in which the private investors value shareholders wealth, and the government values political support and survival, obtained through the transfer of the firms' 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. Theories of privatization or nationalization typically compare, in a static framework, the economic or political efficiency of private and state ownership, either in general, or for a list of specific goods and services. They do not explain, however, why the privatization phenomenon occurred at about the same time in many countries, and why not before, nor can they account for changes in these policies and especially the policy reversals. Recent history shows that the scope of government varies substantially across countries and through time. Privatization phases alternate with nationalization episodes. The post WWII nationalization policies in Europe gave way to a privatization wave in the 1980s and are now followed by a return to nationalization in the context of the current financial crisis.