The Challenges of Privatization: An International Analysis

By Bernardo Bortolotti; Domenico Siniscalco | Go to book overview
Save to active project

1 The Economic Theory of Privatization

1.1 INTRODUCTION

The economists' debate about the proper scope of government in the economy is as old as the economics discipline. Therefore we leave to historians of the economic school the daunting task of tracing back the evolution of this debate. 1 The purpose of this chapter is less ambitious, as it aims to provide a concise survey of the main results in the economic theory of privatization.

This field of research started developing in the 1980s and burgeoned during the 1990s, parallelling the spreading out of the privatization process around the world and with the advance of the contract, political economy, and auction theories.

Curiously, the United Kingdom embarked on the first large-scale privatization programme in the late 1970s largely on faith, as the main privatization theories were not yet developed. As Vickers and Yarrow (1988) note, the UK programme was triggered mainly by dissatisfaction with the performance of the SOE sector and by the need to square public finances. It was certainly not worked out as the Cartesian application of sophisticated theories, but by adopting a practical approach based on the intuitions of some great economists of the past, such as Hayek. 2 However, the UK path-breaking experience was important not only for practical reasons, but also because it provided economists with a laboratory for empirical analyses, allowing the testing of hypotheses and the development of new theories.

This chapter is organized as follows: it starts by introducing several irrelevance results showing that private or public ownership may not matter for the behaviour of firms. These neutrality results are useful benchmarks which hold under strong assumptions, the main one being a government's complete contracting ability. When incomplete contracts are introduced, ownership and governance structure are shown to matter, as they dramatically alter incentives with important consequences for company performance. The incomplete contract approach has strong normative implications which allow for the identification of the costs and benefits of privatization. However, this approach

-5-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited page

Bookmark this page
The Challenges of Privatization: An International Analysis
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen
/ 160

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?