Optimal Partial Privatization with Asymmetric Demand Information

Abstract

We study a mixed duopoly in which only the private firm directly knows product demand and examine a pooling equilibrium in which a welfare-maximizing government may partially privatize the public firm. We show that the optimal extent of privatization differs, often dramatically, from that without asymmetric information. Indeed, we identify circumstances in which the optimal extent of privatization is zero, in sharp contrast with previous work. In addition, the consumer surplus in the pooling equilibrium routinely exceeds that without asymmetric information, and the social welfare exceeds that without asymmetric information when the cost convexity is small.