Alberto Cavaliere

Privatization and Efficiency: from Principals and Agents to Political Economy

We survey the theoretical literature on privatization and efficiency by tracing its evolution from the applications of agency theory to recent contributions in the field of political economy. The first ones extend the theory of regulation with incomplete information to address privatization issues, comparing State Owned Entreprises (SOEs) with private regulated firms. The benefits of privatization may either derive from the constraints it places on malevolent agents or to the impossibility of commitment by a benevolent government because of incomplete contracts. Contributions dealing with political economy issues separate privatization from restructuring decisions. They either explore bargaining between managers and politicians or analyze the impact of privatization shaped by political preferences on efficiency. The theoretical results regarding the relation between privatization and efficiency do not lead to any definitive conclusion. Privatization may increase productive efficiency when restructuring takes place whereas its effects on allocative efficiency still remain uncertain.

Coordination and the Provision of Discrete Public Goods by Correlated Equilibria

The strategic analysis of the private provision of a discrete public good has shown the existence of multiple Nash equilibria with the efficient number of players voluntarily contributing. However the coordination issue is left unexplained by this literature. The experimental evidence shows that communication among players is helpful in achieving cooperation. We claim that, from the theoretical point of view, this is equivalent to playing correlated equilibria in an extended public good game with communication, modeled as Chicken. We characterize such equilibria as feasible coordination mechanisms to achieve public goods provision in the general contribution game. We further introduce a second kind of game characterized by payoff externalities that may persist after the minimal threshold of contributors is achieved. While it is easy to show the existence of Pareto efficient correlated equilibria in the first game, in the second one players face incentive problems such that a first best cannot always be an equilibrium. Nevertheless there exist correlated equilibria that can qualify as incentive efficient mechanisms, once free riding is seen as a moral hazard issue. Finally, with an example, we discuss the impact of coalition formation in our framework. Copyright 2001 by Blackwell Publishing Inc.

Price Competition with Information Disparities in a Vertically Differentiated Duopoly

In this paper we extend the model of vertical product differentiation to also consider information disparities about the extent of quality differences. Equilibrium prices turn out to depend not only on the share of informed consumers but also on uninformed consumers beliefs about quality differences. If uninformed consumers overestimate vertical differentiation, informed consumers exert a positive externality on the purchasers of the high quality good as its price decreases when the share of informed consumers decreases. Considering also that the price of the low quality good increases with the share of informed consumers, higher prices can-not signal high quality goods. If uninformed consumers have pessimistic beliefs and underestimate the extent of vertical differentiation, informed consumers can exert a positive externality on firms. In fact either market demands are inelastic to prices and the profits of the high quality firm increase with the share of informed consumers or market demands are elastic to prices and the profits of both firms increase with the share of informed consumers. In the latter case prices are also equal to those that would prevail with perfect information. In the case of optimistic consumers we can then find some theoretical foundation concerning the fact that information undermines brand, while with pessimistic consumers we can explain demand collapses and insensitivity to price changes due to consumer suspicions about product quality.

A Normative Analysis of Local Public Utilities: Investments in Water Networks

We analyze rehabilitation investments in a regulated water industry with perfectly inelastic demand. We compare alternative organizational solutions for local provision (municipalization, corporatization and privatization), though subject to a common regulatory mechanism. We can then assess the effects of incentive regulation in public firms and find that even benvolent politicians always stick to the price-cap, in order to save on distortionary taxation. However, incentives to invest result to be excessive only in private firms, as the cost of capital is accounted differently by public and private undertakings. We also provide a theory of mixed firms, based on strategic interaction between politicians and managers, which contributes to endogenously explain partial privatization and minority participation by private stockholders. In this last case incentives to invest appear to be driven just by governance and ownership reasons.