Privatization and the Risk of Expropriation

Abstract

When a firm is privatized, the power to make decisions affecting its well-being is transferred more or less from agents working for the government to agents working for the private sector (1). This paper is about the more or less, which is an important qualification, because in many cases of “privatization” the power to make a number of key decisions remains with, or at least might in the future be exercised by, the government itself. For example, government may be able substantially to vary future policy towards competition and regulation in the industry where the firm operates. It might have similar discretion over tax or trade policies that affect the firm specifically. And in the extreme a future gvernment might return the firm to public ownership, possibly on “unfair” terms (2). The catch-all term “expropriation” in the title of the paper reflects, perhaps in an unduly stark fashion, the fact that these measures have the potential significantly to reduce the private value of the privatized assets.

This paper is part of an ESRC funded project on the Regulation of Firms with Market Power. I am very grateful to Laura Catellucci, my discussant, and to Mark Armstrong for their helpful comments. I am responsible for all views expressed and any errors.