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Does Inefficiency Justify Privatization? The Case of Intermediate Industry Monopolies

Author

Listed:
  • Gerhard Glomm

    (Indiana University)

  • Fabio Mendez

    (University of Arkansas)

Abstract

We use an infinitely lived agent model in which an intermediate good is provided either by a public or a private monopolist to study the effects of privatization on steady state levels of income. We allow for public sector inefficiencies(x-inefficiency) which shift down the intermediate goods technology as well as bureaucratic inefficiencies which decrease the amount of tax revenue which will actually be allocated to public investment. We solve the model numerically for reasonable parameter values. The results of the model indicate that the benefits of this type of privatizations depend crucially on the size of the relative inefficiency of public firms and the amount of public investment. Furthermore, the gains from privatization are found to be strongly related to the balance sheet of the public firm that is privatized. Privatization of public firms which run deficits (surpluses) typically generate increases (decreases) in steady state consumption.

Suggested Citation

  • Gerhard Glomm & Fabio Mendez, 2005. "Does Inefficiency Justify Privatization? The Case of Intermediate Industry Monopolies," Macroeconomics 0507024, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0507024
    Note: Type of Document - pdf; pages: 27
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    References listed on IDEAS

    as
    1. Gerhard Glomm & Fabio Mendez, 2009. "Privatization, Deregulation, and Capital Accumulation," Southern Economic Journal, Southern Economic Association, vol. 75(4), pages 976-995, April.
    2. Philippe Aghion & Olivier J. Blanchard, 1994. "On the Speed of Transition in Central Europe," NBER Chapters,in: NBER Macroeconomics Annual 1994, Volume 9, pages 283-330 National Bureau of Economic Research, Inc.
    3. Megginson, William L & Nash, Robert C & van Randenborgh, Matthias, 1994. " The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis," Journal of Finance, American Finance Association, vol. 49(2), pages 403-452, June.
    4. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    5. Castanheira, Micael & Roland, Gerard, 2000. "The Optimal Speed of Transition: A General Equilibrium Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 219-239, February.
    6. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor & Zoega, Gylfi, 1998. "Ownership and Growth," CEPR Discussion Papers 1900, C.E.P.R. Discussion Papers.
    7. Alexeev, Michael & Kaganovich, Michael, 2001. "Dynamics of Privatization under a Subsistence Constraint," Journal of Comparative Economics, Elsevier, vol. 29(3), pages 417-447, September.
    8. Rafael La Porta & Florencio López-de-Silanes, 1999. "The Benefits of Privatization: Evidence from Mexico," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1193-1242.
    9. John Vickers & George Yarrow, 1991. "Economic Perspectives on Privatization," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 111-132, Spring.
    10. SchmitzJr, James A., 2001. "Government production of investment goods and aggregate labor productivity," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 163-187, February.
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    More about this item

    Keywords

    Privatization; Deregulation; Public Inefficiency; Public Monopolies;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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