Privatization in oligopoly: the impact of the shadow cost of public funds

Carlo Capuano, Giuseppe De Feo

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Abstract

The aim of this paper is to investigate the welfare effect of privatization in oligopoly when the government takes into account the distortionary effect of raising funds by taxation (shadow cost of public funds). We analyze the impact of the change in ownership not only on the objective function of the firms, but also on the timing of competition by endogenizing the determination of simultaneous (Nash-Cournot) versus sequential (Stackelberg) games. We show that, absent efficiency gains, privatization never increases welfare. Moreover, even when large efficiency gains are realized, an inefficient public firm may be preferred.
Original languageEnglish
Pages (from-to)175-208
Number of pages34
JournalRivista Italiana degli Economisti
Volume15
Issue number2
DOIs
Publication statusPublished - Aug 2010

Keywords

  • mixed oligopoly
  • privatization
  • endogenous timing
  • distortionary taxes

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