When Do State-Owned Firms Crowd Out Private Investment?
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- Buehler, S. & Wey, S. J Ind Compet Trade (2014) 14: 319. doi:10.1007/s10842-013-0164-y
This paper examines the conditions under which a state-owned firm with a political agenda strategically crowds out investment by a private firm. Employing reduced-form analysis, we show that strategic crowding out occurs if (i) the private firm regards investments as strategic substitutes, and (ii) private investment is undesirable from the state-owned firm’s perspective. We discuss how our analysis applies to real-world markets and argue that it provides an explanation for the ambivalent evidence on the effect of public on private investment: State ownership is neither necessary nor sufficient for crowding out to occur.