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A Positive Theory of Privatization


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  • Arieh Avishur

    (Ben-Gurion University)


This paper presents a theory that explains the prevalence of different models of privatization across countries and across industries. First, it establishes the analytical framework for determining the impact of privatization on the value of a privatized firm, on aggregate social welfare, and on the relevant interest groups: taxpayers, consumers, employees, and private investors. Merging both the income distribution and the production efficiency aspects of the process, it identifies the government's principal decision variables, and presents the political tradeoffs faced by the government when carrying out privatization. Based on this framework, the paper offers an outline for testing the hypothesis that privatization introduces a Pareto-dominating mode of operation. Two fundamental laws of privatization define necessary and sufficient conditions for Pareto-dominance. Based on four economically sensible principal assumptions, the paper analyzes the government's behavior under alternative objective functions: maximization of taxpayer welfare, maximization of aggregate social welfare, and maximization of political support. The main result reveals that a vote-maximizing government sets the optimal value of its decision variables, depending on the characteristics of the political market. This result is illustrated through a cross-country and a cross-industry comparison.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): III (2000)
Issue (Month): (May)
Pages: 1-55

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Handle: RePEc:cem:jaecon:v:3:y:2000:n:1:p:1-55

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Related research

Keywords: privatization; positive economics; political tradeoffs; Popular Capitalism; Nomenklatura Companies.;

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Cited by:
  1. Kayizzi-Mugerwa, Steve, 2002. "Privatization in sub-Saharan Africa: On Factors Affecting Implementation," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Druk-Gal, Bat-Sheva & Yaari, Varda, 2006. "Incumbent employees' resistance to implementing privatization policy," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 59(3), pages 374-405, March.
  3. Parker, David & Kirkpatrick, Colin, 2003. "Privatisation in Developing Countries: A Review of the Evidence and the Policy Lessons," Centre on Regulation and Competition (CRC) Working papers, University of Manchester, Institute for Development Policy and Management (IDPM) 30623, University of Manchester, Institute for Development Policy and Management (IDPM).
  4. Willner, Johan & Parker, David, 2002. "The Relative Performance of Public and Private Enterprise Under Conditions of Active and Passive Ownership," Centre on Regulation and Competition (CRC) Working papers, University of Manchester, Institute for Development Policy and Management (IDPM) 30591, University of Manchester, Institute for Development Policy and Management (IDPM).


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