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Limits to Policy Reversal: Privatization in India

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Author Info
Siddhartha G. Dastidar
Raymound Fisman
Tarun Khanna
Abstract

We examine the effect of regime change on privatization using the 2004 election surprise in India. In that election, the pro-reform BJP was un-expectedly defeated by a less reformist coalition. Government controlled companies that were being studied for complete privatization by the BJP dropped by 7.5 percent relative to private firms. By contrast, government controlled firms that were not being considered for privatization, or firms that had already been fully privatized firms, did not experience significant drop relative to private firms. Firms that the BJP had slated for definite future privatization experienced intermediate declines of approximately 3.5 percent. We interpret this as evidence consistent with investor belief of policy irreversibility in privatization, where reforms may reach a 'point of no return' beyond which future regimes have difficulty reversing those policies. Taking advantage of an 'intermediate' event where policies were expected to be more heavily influenced by the communist party, we still find evidence consistent with policy irreversibility.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d05-158.

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Date of creation: Mar 2006
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Handle: RePEc:hst:hstdps:d05-158

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  1. Andrei Shleifer, 1998. "State Versus Private Ownership," NBER Working Papers 6665, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March. [Downloadable!] (restricted)
  3. Nandini Gupta, 2005. "Partial Privatization and Firm Performance," Journal of Finance, American Finance Association, vol. 60(2), pages 987-1015, 04. [Downloadable!] (restricted)
  4. Perotti, Enrico C, 1995. "Credible Privatization," American Economic Review, American Economic Association, vol. 85(4), pages 847-59, September. [Downloadable!] (restricted)
  5. William L. Megginson & Jeffry M. Netter, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June. [Downloadable!] (restricted)
  6. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
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