Does Inefficiency Justify Privatization? The Case of Intermediate Industry Monopolies
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.
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