Economic Theories of Privatisation and Corporatisation

Despite the widespread use of privatisation and corporatisation to reform public sector enterprises, there are very few models which formally analyse these policy tools from a contract-theoretic perspective. This paper develops such a model. Following Schmidt (1990) we argue that if contracts are complete, then the choice between public and private ownership of assets should be a matter of indifference to a benevolent policy-maker. Further, for a trade-off to exist between private and public ownership, we argue that incompleteness is required over some aspects of both profits and non-profit social surplus. If contracts are complete over social and not private surplus, then privatisation with regulation is optimal. If contracts are complete over private surplus and not social surplus, then we are indifferent between ownership structures. Issues of partial privatisation and corporatisation are also discussed. In particular, it is demonstrated that corporatisation can lead to outcomes which are worse than partial privatisation, and should be questioned as a policy tool, when partial privatization is feasible.