Veto Players and the Value of Political Control

Abstract

We examine how veto players and the government’s valuation of political control of economic activity affect the likelihood of privatization. When the government ascribes a high value to political control, veto players impede privatization because they would have to be compensated for their losses. When the value of political control is low, the government prefers to privatize enterprises that become difficult to control with multiple veto players. We test the theory against data on energy privatizations in developing countries, 1988-2008. Oil prices offer a quantitative measure of the government’s valuation of controlling the energy sector. When oil prices are high, the government has a keen interest in controlling the energy sector. Accordingly, additional veto players reduce (increase) the likelihood of privatization in times of high (low) oil prices. Beyond illuminating the politics of privatization, the results inform debates on the role of veto players in government policy.