Nombela, Gustavo
(1998)
A political economy approach to privatisation of public firms.
PhD thesis, London School of Economics and Political Science.
Abstract
The economic policy named as privatisation has been one of the most popular among governments around the world since the early 1980's. Initially defined as the sale of state- owned enterprises. This thesis tries to be a contribution to privatisation, able to explain the fundamental causes of the inefficiency gap and the reasons why the present trend towards privatisation is being observed across the world. After a thorough revision of the existent literature, two theoretical models analyse different aspects of the problem. A common basic framework is used in both of them: the usual assumption of benevolent welfare- maximising governments is replaced by a more realistic approach to governments as non- benevolent vote-seeking agents. In addition, two empirical contributions are presented to examine how predictions from the political approach to privatisation are related to actual observations from public firms. The first theoretical model (chapter 2) studies how governments' ideologies can influence privatisation decisions. A voting game between two political parties is studied, showing that although ideology plays a role, strategic considerations are of greater importance to governments when taking decisions about public firms and privatisation. Results derived from this model explain the actual observation about privatisation being performed by governments of very different type of ideologies. The role that tight public budget constraints may have played on privatisations is also examined. The second model (chapter 3) analyses the problem of overstaffing of firms and its relationship to ownership structure. A non-benevolent government is assumed to take decisions under uncertainty over the size of a project or the level of a service to be publicly provided. Three types of firm can produce the good: a publicly-owned firm or a contracted-out private firm, regulated either with a complete or an incomplete contract. Outcomes are compared, showing that the public firm tends to be inefficiently larger in more states of nature. However, private firms may provide lower than optimal levels of service in more cases, the problem being more severe under incomplete contracting. These results help us to understand three key points: one fundamental cause of the inefficiency gap, how privatisation may solve the problem, and some of the potential drawbacks of the policy. The first empirical contribution (chapter 4) is a case of study for the Spanish urban bus industry. Using data from a sample of firms, a translog cost function is estimated to evaluate the relative inefficiency of public firms. Results indicate that public firms are highly overstaffed and pay high wages to their workers, even if labour productivity is low. Since private firms are also regulated by city councils and subject to the same laws, this case is presented as an example of the preference of politicians for direct control of firms instead of pursuing personal agendas through regulated firms. The second empirical contribution (chapter 5) estimates political effects over employment and wages using data from US local governments. A bargaining model between a non-benevolent government and a union is proposed and solved. First-order conditions and reduced-form equations of this model are then estimated using data from several services provided directly by US local authorities. Results indicate that looser controls over politicians lead to a larger number of workers employed and to higher wages. Unions' effects on wages are significant, while not so relevant impact on employment is observed. This empirical evidence supports the idea that political factors are highly relevant in explaining public firms' inefficiency, specially when they are combined with trade unions' effects. (Abstract shortened by UMI.).
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