Collusion with Public and Private Ownership and Innovation
46 Pages Posted: 24 Oct 2017 Last revised: 20 May 2018
Date Written: May 19, 2018
We argue that public ownership helps firms avoid head-to-head competition. However, collusion opportunities on existing technologies reduce the commitment to develop new ones, and could destroy firm value. We show that the latter effect dominates when a new technology's expected profitability is intermediate, in which case private ownership is optimal. Opportunities to avoid competition increase firm value when new technologies appear either only marginally or very attractive, resulting in a U-shaped relation between the attractiveness of innovation and public ownership. While buying equity stakes also reduces competition, it is an imperfect substitute. Our main predictions are consistent with empirical patterns and shed light on several puzzling stylized facts.
Keywords: Public and Private Ownership, Innovation, Collusion
JEL Classification: G31, G32, L41, O31
Suggested Citation: Suggested Citation