Privatization: A Theoretical Framework

38 Pages Posted: 20 Apr 2000

See all articles by Vihang R. Errunza

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC; University of California, Berkeley - Haas School of Business

Date Written: February 2000

Abstract

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

Errunza, Vihang R. and Mazumdar, Sumon C., Privatization: A Theoretical Framework (February 2000). Available at SSRN: https://ssrn.com/abstract=209569 or http://dx.doi.org/10.2139/ssrn.209569

Vihang R. Errunza (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC ( email )

2000 Powell Street, Suite 600
Emeryville, CA 94608
United States
510-450-5493 (Phone)

University of California, Berkeley - Haas School of Business

Finance Department
Berkeley, CA 94720
United States

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