Competition and privatization

Abstract

In this paper we study the interaction between privatization and competition (liberalization) in the market. privatization is understood as a change in the objective of the owners of the firm. A public firm maximizes social welfare and a private firm maximizes profits. We find that this diference in objectives matters less the greater the level of competition because then the behavior of a welfare maximizing firm converges to the behavior of a profit maximizing firm. This result implies that privatization works better the greater the competition. On the other hand, the revenues obtained from privatization are decreasing with the level of competition. This implies that privatization aimed to raise revenues impose a cost in terms of allocative eficiency.