Foreign ownership, privatization and subsidization with shadow cost of public funds

Abstract

We examine how the shadow cost of public funds will affect the privatization policy in the presence of strategic tax/subsidy policies in a mixed oligopoly model with foreign ownership. We show that (1) When the dual policies are employed, the privatization policy is partial privatization and the production tax may be used if the shadow of the public fund is relatively large; (2) When the privatization policy is employed, the degree of privatization is decreasing in the shadow cost of public funds if the share of foreign investors in the private firms is relative small; however, when the dual policies are employed, the degree of privatization is increasing in the shadow cost of public funds. Additionally, we show that the influence of foreign ownership on the privatization and subsidization policies are dependent upon the cost structures, ownership types, distribution of firms, and policy pairs.