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 objetive of the owners of the firm. A public firm maximizes social welfare and a private firme maximizes profits. We find that this difference in objectives matters less the greater the level of competition because then the behavior of a wealfare maximizing firm converges to the behavior of a profit maximizing firm. This result implies that provatization work better the greater the competition. On the other hand, the revenue 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 efficiency.