Privatization: A Theoretical Framework
38 Pages Posted: 20 Apr 2000
Date Written: February 2000
Recent empirical studies have documented the dramatic growth of privatizations globally and the resultant efficiency gains. We develop a theoretical model that incorporates the costs and benefits of privatization as complex options. This framework allows us to highlight the impact of government's overall public sector policies on the potential benefits of privatization, illustrate the manner in which a government's specific policies concerning the SOE before and after privatization affects its share price at privatization and examine the role of subsidies, tax shields and bankruptcy costs in determining the optimal leverage and investment choices made by the firm's management after privatization. It yields testable hypotheses and policy implications concerning the prioritization of SOE sales, public sector investment policies, tax subsidies, entry restrictions, and the state's use of monopoly power.
JEL Classification: F3, G3, O2
Suggested Citation: Suggested Citation