When Do State-Owned Firms Crowd Out Private Investment?
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This paper examines the conditions under which a state-owned firm with a political agenda strategically crowds out investment by a private firm. Employing reduced-form analysis, we show that strategic crowding out occurs if (i) the private firm regards investments as strategic substitutes, and (ii) private investment is undesirable from the state-owned firm’s perspective. We discuss how our analysis applies to real-world markets and argue that it provides an explanation for the ambivalent evidence on the effect of public on private investment: State ownership is neither necessary nor sufficient for crowding out to occur.
KeywordsPublic investment Crowding out Political agenda
JEL ClassificationD43 H42 L13
We are grateful to the managing editor, Michael Peneder, and two anonymous referees for helpful comments. We also thank Christian Ewerhart, Daniel Halbheer, Martin Kolmar, Markus Lang, Jochen Mankart and Mark Schelker for helpful discussions and suggestions. Financial support from the Swiss National Science Foundation through grants PP0011-114754 and PP00P1-135143 is gratefully acknowledged.
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