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Investment-driven mixed firms: partial privatization by local governments

Author

Listed:
  • A. Cavaliere

    (Università di Pavia
    IEFE-Università Bocconi)

  • M. Maggi

    (Università di Pavia)

  • F. Stroffolini

    (Università di Napoli, Federico II)

Abstract

We analyze partial privatization by local governments, driven by investment and credit constraints, and provide a theory of monopolistic mixed firms based on strategic interaction between local politicians and private shareholders. Minority participation by private investors—as empirically observed—arises endogenously in the model to prevent investment expropriation. We consider the example of water supply with perfectly inelastic demand and fixed-price regulation, coupled with price discretion at a local level. Welfare-maximizing local governments face a trade-off between the increase in consumers’ surplus and the reduction in costly public funds. Therefore, private shareholders choose investment to keep the government share at a threshold such that the politician always sticks to the price-cap and dividends are then maximized. To consider normative issues, we compare investment by mixed firms and by a social planner.

Suggested Citation

  • A. Cavaliere & M. Maggi & F. Stroffolini, 2017. "Investment-driven mixed firms: partial privatization by local governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(3), pages 459-483, June.
    • Handle: RePEc:kap:itaxpf:v:24:y:2017:i:3:d:10.1007_s10797-016-9426-z
    DOI: 10.1007/s10797-016-9426-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate governance; Investment expropriation; Price-cap regulation; Water networks;
    All these keywords.

    JEL classification:

    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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