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Does Inefficiency Justify Privatization? The Case of Intermediate Industry Monopolies

  • Gerhard Glomm

    (Indiana University)

  • Fabio Mendez

    (University of Arkansas)

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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Paper provided by EconWPA in its series Macroeconomics with number 0507024.

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Length: 27 pages
Date of creation: 22 Jul 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0507024
Note: Type of Document - pdf; pages: 27
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Blanchard, Olivier Jean & Aghion, Philippe, 1994. "On the Speed of Transition in Central Europe," Scholarly Articles 4481322, Harvard University Department of Economics.
  2. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  3. 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.
  4. 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 403-52, June.
  5. Alexeev, Michael & Kaganovich, Michael, 2001. "Dynamics of Privatization under a Subsistence Constraint," Journal of Comparative Economics, Elsevier, vol. 29(3), pages 417-447, September.
  6. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor & Zoega, Gylfi, 1998. "Ownership and Growth," CEPR Discussion Papers 1900, C.E.P.R. Discussion Papers.
  7. Rafael La Porta & Florencio López-de-Silanes, 1997. "The Benefits of Privatization : Evidence from Mexico," World Bank Other Operational Studies 11583, The World Bank.
  8. 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 219-39, February.
  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. Gerhard Glomm & Fabio Mendez, 2009. "Privatization, Deregulation, and Capital Accumulation," Southern Economic Journal, Southern Economic Association, vol. 75(4), pages 976-995, April.
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