Abstract

Control over a state-owned enterprise (SOE) offers politicians various benefits (rent from control). If politicians decide to privatize a SOE, they loose such rent. To "explain" privatizations one should thus consider under which conditions politicians may obtain from privatization benefits greater than the present value of the rent from control. Modelling this trade-off helps to understand country differences in volume, timing and modalities of privatizations. Incentives to privatize are different depending upon whether the SOE operates in a competitive market or runs a natural monopoly. In the latter case, while potential efficiency gains may be limited, privatization reduces the political cost of increasing tariffs and offers to the politicians the opportunity to gain a new, different rent from the private enterprise. In regulated markets, after privatization politicians have an incentive to set tariffs at a higher level. Privatizations may thus not be desirable, if potential efficiency gains are limited.