The Optimal Choice of Privatizing State-Owned Enterprises: A Political Economic Model

Abstract

We study the choice of a maximizing Bureaucrat over privatization policies and their effects on consumer welfare in a transition economy. We study a Bureaucrat whose objective function is maximizing a surplus budget subject to the constraint of staying in office, and a Bureaucrat who maximizes popularity/consumer welfare subject to the constraint of a balanced budget. Other things being equal, both types of Bureaucrat will privatize the sector (firms) with the least market power and the most subsidy first. This is the "cheapest" way to privatize state-owned enterprises. Also, it is shown that it is relatively easier and faster to privatize in a less democratic society.