Economc Analysis of Privatization

This collection of papers originates from myinterest in the reform efforts in transitionaleconomies. Each of the chapters is self-contained.Chapter one presents a brief literature surveyof those schools of thought that have contributedto our knowledge about privatization.In chapter two, a public firm model and a privatefirm model are compared based on agency approach,assuming that the owner of a firm has costinformation but also bears the cost of production.I find that the question which type of ownership,private or public, is superior does not have a clearcut answer. Private ownership may induce higherwork effort but suffers from a discrepancy ofprivate and social goals. While productiondistortion is less serious, an obvious disincentiveto work exists in the public firm.Chapter three examines how privatization can beconsidered as a threat to stimulate a public firmmanager's work incentive when his effort level cannotbe observed by the government. I find that, in the casewhen commitment to privatize is impossible, the governmentwill set a strictly positive wage rate and a strictlypositive investment subsidy to signal the government'sdetermination to implement the privatization policy.In chapter four, I examine the role that public investmentplays in a financial market with a credit rationing problem.Two kinds of borrowers co-exist in the economy, namely thepublic and the private. Public borrowers enjoy a "firstmover" advantage to borrow money from banks.In this situation, the credit rationing is found escalating.But since the success of a public project (owned by a publicborrower) can exert positive externality on the productivityof private projects, the adverse effect induced by credit rationingcan be alleviated. We show that if the quality of the publicprojects is good enough, the economic growth rate can be higherthan the case without public projects in the economy.