Contestable privatization

Abstract

Our stylized rent-seeking model of privatization elucidates the empirical problems of making and implementing privatization. We treat privatization as a strategic game with the public enterprise’s employees and an outside investor competing for privatized rents by lobbying. At another level, bureaucrats (the privatizing authority) are concerned with social welfare and the resources spent by the contestants. Our two main results establish that increased selfishness of the government reduces the sale price of the company while increasing the probability of privatization and that a budgetary constraint on the employees’ lobbying increases the probability of privatization while reducing the sale price.