Can There Be Too Much Privatization? The Role of Political Incentives

Generally, privatization of state-owned enterprises is believed to enhance economic efficiency and competitiveness and to improve the overall economic performance of a country. So, can there be too much privatization? We show that this depends on the political objectives that are pursued with a privatization policy. We study two types of government: a budget-oriented one which aims at generating revenues and which shows some similarities to the governments of the GIIPS countries (Greece, Italy, Ireland, Portugal, and Spain); and a citizen-oriented one which aims at maximizing the income of its citizens and which bears some resemblance to the East European transition countries. In accordance with the empirical literature, the budget-oriented type shows a larger propensity to privatize than the citizen-oriented type. But for both types of government, we identify instances where they privatize too much relative to the social optimum. It follows that privatization programs must be designed with the necessary caution.