Discussion Paper No.1405

Abstract :
Partial privatization is implementable only if private investors have incentives to purchase the shares of public firms. With this obvious fact in mind, we reconsider partial privatization in a mixed oligopoly in which one domestic public firm competes with multinational firms. We show that if the fraction of foreign ownership of multinational firms is large, the government cannot help choosing the privatization policy under which the profit of the privatized firm is equal to zero, instead of implementing the welfare-maximizing degree of privatization. Furthermore, using a linear demand model, we find that the optimal policy changes from the zero-profit degree of privatization to full nationalization once the fraction of foreign ownership exceeds a certain level.

Keywords : Partial Privatization; International Competition; Mixed Oligopoly
JEL classification: F12; L33