Collusion with Public and Private Ownership and Innovation
45 Pages Posted: 24 Oct 2017 Last revised: 18 Jan 2018
Date Written: January 18, 2018
We argue that public ownership helps firms collude and engage in rent seeking. However, the option to collude on existing technologies reduces the commitment to develop new ones, and could destroy firm value. In particular, if a new technology's expected profitability is intermediate, public ownership destroys value enhancing innovations and private ownership dominates. The collusion that public ownership facilitates increases firm value for technologies appearing 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 facilitates collusion, 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