The Political Economy of Privatization

International organizations promote privatization as precondition
for economic development. But is there really too little
privatization? This political economy model asks for the incentives
of governments to privatize or restructure a state-owned firm.
Different government types are compared to identify the political
and institutional determinants of privatization. Under
privatization, governments commit not to influence the
profit-maximizing employment choice by private investors. With
respect to the social optimum, both voter-oriented and egoistic
governments can have inefficiently high incentives to privatize.
When this is the case, outside pressure to privatize is
detrimental. An improving institutional environment reduces these
inefficiencies.