Shadow cost of public funds and privatization policies

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Abstract We investigate the impacts of government budget constraints on the optimal privatization policy in mixed oligopolies by introducing the shadow cost of public funds. The government is concerned with both the total social surplus and the revenue obtained by privatization. We find that the relationship between the shadow cost of public funds and the optimal privatization policy is non-monotone. When the cost is moderate, the higher the cost, the lower the optimal degree of privatization. However, when the cost is high, a cost increase may drastically increase the optimal degree of privatization. The average foreign ownership share in private enterprises affects the optimal degree of privatization, whereas the distribution of foreign ownership share among private firms does not. Foreign ownership shares in privatized public enterprises also influence the optimal degree of privatization, and a non-monotone relationship emerges for the smaller shadow cost of public funds when the share is larger.

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