Optimal Partial Privatization in an International Mixed Oligopoly Under Various Tax Principles

This chapter considers optimal privatization policy in an international mixed oligopoly. Allowing for partial privatization and cost asymmetry, we analyze the optimal policies under various tax regimes: arbitrary taxation, origin principle, destination principle, import tariffs, and a combination of tax and import tariffs. Our main results are as follows. First, when the government can arbitrarily levy taxes on a public firm’s output, maximum welfare is independent of the degree of privatization as long as the public firm is at least partially privatized. Second, under tax schemes that restrict freedom of taxation, an optimal privatization policy depends on tax regimes and cost asymmetry. Third, the elimination of import tariffs and the privatization of public firms improve both domestic welfare and a foreign competitor’s profit if a production subsidy is introduced in exchange for tariff elimination. Our results suggest that fiscal incentives such as tax and subsidies are superior in maximizing welfare when compared with managerial incentives such as public ownership.