An efficient privatization mechanism

We consider the privatization of State-Owned Enterprises (SOEs) of which markets can be opened to competition once privatization takes place and competitors can compete successfully against them in a few years. The currently used “Revenue Maximization (RM)” scheme maximizes the government revenue from privatization but does not provide incentives for the privatized SOE to charge a price lower than the monopoly price until competition arises. We propose the “Welfare Maximization (WM)” scheme, which induces the privatized SOE to charge a competitive price without resorting to regulation. Also, WM provides greater incentives for post-privatization cost reduction.