Optimal Partial Privatization in the Presence of Foreign Competition: The Role of Efficiency Differentials and Unemployment

This paper studies the privatization policy on a domestic state-owned enterprise (SOE), by incorporating the features of unemployment and efficiency differentials-both exogenous and endogenous-between the SOE and a foreign-owned firm, in a partial-equilibrium mixed oligopoly setting. We characterize and compare the optimal privatization policies under different scenarios, and find that the presence/absence of labor efficiency differentials and unemployment interact in an interesting way. In addition, when there is unemployment, the trading of between labor inefficiency and unemployment in privatization decision depends on the magnitude of damage on the labor efficiency due to an increase in state ownership of the SOE, but not so under full employment.