Strategic behaviors on privatization between regions

Abstract

In this paper, focusing on the policy initiatives between the central government and local governments, we analyze the privatization policies in a mixed oligopoly model composed of two regions. The main results are as follows. First, in the case of centralized regime, partial privatization is socially desirable if the substitutability between goods is relatively high; if not, full nationalization is socially desirable. In the case of decentralized regime, local governments take partial privatization in the equilibrium irrespective of substitutability. However, the local governments tend to lower the partial privatization rate of public firms as the substitutability between goods increases. Second, the central government is more (resp. less) aggressive for privatization than the local governments when the substitutability is higher (resp. lower) than the critical level. This shows that the argument in Han and Ogawa (FinanzArchiv Public Financ Anal 64(3):352–363, 2008) is justifiable under certain conditions. Finally, decentralization brings forth an increase (resp. a decrease) in market size and consumer surplus if the substitutability is higher (resp. lower) than the critical level. However, the social welfare necessarily decreases by the decentralization for any levels of substitutability.