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A Positive Theory of Privatization


  • 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.

Suggested Citation

  • Arieh Avishur, 2000. "A Positive Theory of Privatization," Journal of Applied Economics, Universidad del CEMA, vol. 3, pages 1-55, May.
  • Handle: RePEc:cem:jaecon:v:3:y:2000:n:1:p:1-55

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    Cited by:

    1. Samuel Adams & Berhanu Mengistu, 2008. "The Political Economy of Privatization in Sub-Saharan Africa," Social Science Quarterly, Southwestern Social Science Association, vol. 89(1), pages 78-94.
    2. Druk-Gal, Bat-Sheva & Yaari, Varda, 2006. "Incumbent employees' resistance to implementing privatization policy," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 374-405, March.
    3. Kayizzi-Mugerwa, Steve, 2002. "Privatization in sub-Saharan Africa: On Factors Affecting Implementation," WIDER Working Paper Series 012, World Institute for Development Economic Research (UNU-WIDER).
    4. David Parker & Colin Kirkpatrick, 2005. "Privatisation in Developing Countries: A Review of the Evidence and the Policy Lessons," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 513-541.
    5. 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 30591, University of Manchester, Institute for Development Policy and Management (IDPM).

    More about this item


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

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions


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