Two faces of privatization
Creators: name: Alves, Ivan
Publisher: name: University of British Columbia
Year: 2009

description: Few countries in Latin America, and the developing world in general, have not implemented some type of economic reform, with profound economic consequences. Potential income effects for large social groups have been deemed insignificant when set against the expected overall efficiency improvements. This dissertation presents two models addressing important potential shortcomings of recently implemented reforms: they question standard assumptions about the positive underlying economic processes and characterize some conditions where reform may have perverse effects. In particular, the first paper argues that capitalization may serve as a vehicle for increasing the consumption of a self-serving political class that improves the lot of some income groups at the expense of aggregate welfare, while the second suggests that the sale of large public utilities may result, depending on the resulting ownership distribution, in inefficient production plans. The first chapter presents a variation of the infinite horizon model where we introduce the weight of private and public capital in aggregate capital, an input for the production of the consumption good. Capitalization, by decreasing the state's weight in aggregate capital, serves as an important vehicle altering the income of various groups, most importantly that of the political class. In particular, it is shown that the capitalization package may be Pareto inferior at the steady state, despite creating benefits for both the capitalist and the political classes. We illustrate the possibility of policy being influenced by the evolution of other variables in the model and show that the experience with reform typical of developing countries can be well explained in a context of a rational political class, shifting between coalitions in alternative steady-states. The second chapter develops a model where the price setting behavior of a privatized monopoly is determined endogenously by shareholders. The population of owners, who are also consumers, and perhaps workers, is heterogenous with respect to their autonomous wealth, their participation as workers in the production of the monopoly good and their share of the monopoly's rent. The model reveals the sensitivity of the post-privatization pricing behavior of the firm to the distribution of ownership that results from privatization. In particular, policy makers, by determining the concentration and distribution of ownership, gain some freedom in choosing a given policy objective, such as efficient pricing. In this context, we look at the impact of alternative policy objectives of the central planner on the post-divestiture pricing behavior of the monopoly and find out that well-intended objectives may have perverse outcomes. We also contrast the freedom available to the central planner under alternative divestiture programs, and suggest that whereas auction places a considerably lower information demand on the central planner, it reduces significantly the planner's policy freedom. However, there remains the caveat that freeing the trade of shares is likely to result in renewed concentration and more inefficient production plans.