Essays on political economy of privatization

UnrestrictedEmpirical observation of partial privatizations across countries is puzzling. This research finds empirical evidence that privatization programs have not been driven by ideological or “efficiency” reasons, but rather by the pragmatic cost-benefit tradeoffs made by the politicians, and the economics of privatization often dominates its politics. Using data from 43 countries on more than 4700 privatization transactions, I find strong empirical support for Institutional Quality as consistent and significant determinant of proportion of partial privatization. Surprisingly, countries having higher corruption tend to have higher proportion of privatization in competitive sector, but lower privatization in core sector. Counter to anecdotal evidence, this research finds that political constraints have no significant impact on partial privatization proportion. Further, fiscal crisis drives politicians to privatize, but has no significant effect on privatization proportion. These empirical findings motivate a political economy model of privatization and three results stand out: first, the distortion in the privatization proportion depends upon the institutional quality parameter relative to a measure of private sector efficiency and the distortion increases as institutional quality declines; second, the effort level of private buyer firm declines as institutional quality declines. And third, under heterogeneous preferences of citizens, the privatization proportion declines. The third part of this research I study the impact of the privatization proportion on firm performance in India and document two important and new findings. First, the privatization proportion has no significant impact on firm performance when we control for regulatory conditions and listing on stock exchange. Second, partial privatization has no negative impact on employment in partially privatized firms.; We find significant empirical support for the argument that the regulatory conditions and listing on the stock exchange are the sources of improvement in the performance of partially privatized firms and not the privatization proportion