Privatization and Liberalization: Costs and Benefits in the Presence of Wage‐bargaining

Abstract

The most important economic motive for privatization and liberalization is to reduce costs, which are believed to be higher in a public monopoly for several reasons, including internal rent capture. We assume that there is wage-bargaining both before and after privatization and liberalization. Wages are then in most cases reduced by liberalization but not by privatization as such. Social welfare may increase after liberalization with decentralized wage-bargaining if many firms enter, if the employees' bargaining strength is high and if there is no need of vertical separation. However, the social costs of privatization and liberalization are more likely to dominate despite free entry if sunk costs are high, and will always dominate under central wage-bargaining or vertical separation. *

Reforming a network industry: consequences for cost efficiency and welfare

“…2. As shown elsewhere, distorted objectives and higher wages because of internal rent capture do not necessarily make a public monopoly welfare-reducing (Willner 2001;Grönblom and Willner 2008). Note however that public ownership has also been associated with corruption in some countries, not least because of the wide international variations in the quality of governance (Kaufmann, Kraay, and Mastruzzi 2004).…”

“…Moreover, the benefits of performance-related pay are controversial, not least because of the possibility of motivation crowding out (see Frey 1997). The analysis may also be extended to internal rent capture (analysed in the bargaining model without principals and agents in Grönblom and Willner 2008) or issues of governance quality. There are also disadvantages related to competition and vertical separation that we have not dealt with, such as issues related to quality, reliability, price volatility, and remaining market power, which many contributions cited above have addressed.…”

Strategic Budget Constraints in a Unionized Mixed Oligopoly

“…See also Matsumura and Tomaru (2009) for a model of subsidization with an excess taxation burden under a mixed duopoly. Additionally, Gronblom and Willner (2008) assume that marginal costs are constant with respect to the output, which is expressed as c = c0 + lw, where l stands for the labour input per unit of output and c0 for non-wage components under the setup of a mixed oligopoly. We assume that the public and private firms are unionized, and that wages are determined as a consequence of bargaining between firms and unions.…”

Unionization Structures, Budget Constraint and Privatization

“…Wang et al (2014) show that in the presence of cross-ownership associated with an improvement of production inefficiency of the public firm, the optimal privatization policy is full privatization whether budget constraints are imposed on the public firm.5For literature on union bargaining in mixed oligopoly, see De Fraja (1993),Willner (1999), Gronblom andWillner (2008),Ishida and Matsushima (2009) andChoi (2011a).…”