Privatizations in Developing Countries and the Government's Budget Constraint

We study the impact of government's budget constraint on the privatization decision of increasing returns to scale industry. Privatization is associated with prices liberalization, public ownership with regulation. Under public ownership the governments balance the benefits of taxing profitable public firms with the cost of soft-budget constraint. Privatization hardens the firms budget constraint, but yields prices distortion. With natural monopoly privatization is preferred to regulation for intermediate values of the shadow cost of public funds. On the other hand with natural duopoly regulated competition is always preferred to privatization.

  • Authors: Emmanuelle Auriol and Pierre Picard
  • Year: 2004
  • Organisation: University of Toulouse and University of Manchester
  • Publisher: SSRN
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