Journal of Industry, Competition and Trade

, Volume 14, Issue 3, pp 319–330 | Cite as

When Do State-Owned Firms Crowd Out Private Investment?

  • Stefan Buehler
  • Simon Wey


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.


Public investment Crowding out Political agenda 

JEL Classification

D43 H42 L13 



We are grateful to the managing editor, Michael Peneder, and two anonymous referees for helpful comments. We also thank Christian Ewerhart, Daniel Halbheer, Martin Kolmar, Markus Lang, Jochen Mankart and Mark Schelker for helpful discussions and suggestions. Financial support from the Swiss National Science Foundation through grants PP0011-114754 and PP00P1-135143 is gratefully acknowledged.


  1. Anderson SP, de Palma A, Thisse J-F (1997) Privatization and efficiency in a differentiated industry. Eur Econ Rev 41(9):1635–1654CrossRefGoogle Scholar
  2. Andrianova S, Demetriades P, Shortland A (2012) Government ownership of banks, institutions and economic growth. Economica 79(315):449–469CrossRefGoogle Scholar
  3. Bennedsen M (2000) Political ownership. J Public Econ 76(3):559–581CrossRefGoogle Scholar
  4. Body of European Regulators for Electronic Communications (2010) Next generation access—implementation issues and wholesale products. Annex: BoR (10) 08bGoogle Scholar
  5. Boycko M, Shleifer A, Vishny RW (1996) A theory of privatisation. Econ J 106(435):309–319CrossRefGoogle Scholar
  6. Bulow JI, Geanakoplos JD, Klemperer PD (1985) Multimarket oligopoly: strategic substitutes and complements. J Polit Econ 93(3):488–511CrossRefGoogle Scholar
  7. Che J (2009) A dynamic model of privatization with endogenous post-privatization performance. Rev Econ Stud 76(2):563–596CrossRefGoogle Scholar
  8. Cremer H, Marchand M, Thisse J-F (1991) Mixed oligopoly with differentiated products. Int J Ind Organ 9(1):43–53CrossRefGoogle Scholar
  9. David PA, Hall BH, Toole AA (2000) Is public R&D a complement or substitute for private R&D? A review of the econometric evidence. Res Policy 29(4–5):497–529CrossRefGoogle Scholar
  10. Delbono F, Denicolò V (1993) Regulating innovative activity: the role of a public firm. Int J Ind Organ 11(1):35–48CrossRefGoogle Scholar
  11. Fudenberg D, Tirole J (1984) The fat-cat effect, the puppy-dog ploy, and the lean and hungry look. Am Econ Rev 74(2):361–366Google Scholar
  12. Gallego G, Woonghee TH, Wanmo K, Phillips R (2006) Price competition with the attraction demand model: existence of unique equilibrium and its stability. Manuf Serv Oper Manag 8(4):359–375Google Scholar
  13. Glaeser EL, Shleifer A (2001) Not-for-profit entrepreneurs. J Public Econ 81(1):99–115CrossRefGoogle Scholar
  14. González X, Pazó C (2008). Do public subsidies stimulate private R&D spending? Res Policy 37(3):371–389CrossRefGoogle Scholar
  15. Grossman SJ, Hart OD (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94(4):691–719CrossRefGoogle Scholar
  16. Hart O (1995) Firms, contracts, and financial structure. Oxford University Press, OxfordCrossRefGoogle Scholar
  17. Hart O, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98(6):1119–1158CrossRefGoogle Scholar
  18. Hart O, Shleifer A, Vishny RW (1997) The proper scope of government: theory and an application to prisons. Q J Econ 112(4):1127–1161CrossRefGoogle Scholar
  19. Ishibashi I, Matsumura T (2006) R&D competition between public and private sector. Eur Econ Rev 50(6):1347–1366CrossRefGoogle Scholar
  20. La Porta R, de Silanes FL, Shleifer A (1999) Corporate ownership around the world. J Finance LIV(2):471–517CrossRefGoogle Scholar
  21. La Porta R, de Silanes FL, Shleifer A (2002) Government ownership of banks. J Finance 57(1):265–301CrossRefGoogle Scholar
  22. Laffont J-J, Tirole J (1991) Privatization and incentives. J Law Econ Org 7(special issue):84–105CrossRefGoogle Scholar
  23. Laopodis NT (2001) Effects of government spending on private investment. Appl Econ 33(12):1563–1577CrossRefGoogle Scholar
  24. Matsumura T, Matsushima N (2004) Endogenous cost differentials between public and private enterprises: a mixed duopoly approach. Economica 71(284):671–688CrossRefGoogle Scholar
  25. Megginson WL, Netter JM (2001) From state to market: a survey of empirical studies on privatization. J Econ Lit 39(2):321–389CrossRefGoogle Scholar
  26. Noam EM (2010) Regulation 3.0 for telecom 3.0. Telecommun Policy 34(1–2):4–10CrossRefGoogle Scholar
  27. Poyago-Theotoky J (1999) A note on endogenous spillovers in a non-tournament R&D duopoly. Rev Ind Organ 15(3):253–262CrossRefGoogle Scholar
  28. Schmidt KM (1996a) The costs and benefits of privatization: an incomplete contracts approach. J Law Econ Org 12(1):1–24CrossRefGoogle Scholar
  29. Schmidt KM (1996b) Incomplete contracts and privatization. Eur Econ Rev 40(3–5):569–579CrossRefGoogle Scholar
  30. Shleifer A (1998) State versus private ownership. J Econ Perspect 12(4):133–150CrossRefGoogle Scholar
  31. Shleifer A, Vishny RW (1994) Politicians and firms. Q J Econ 109(4):995–1025CrossRefGoogle Scholar
  32. Vickers J, Yarrow G (1988) Privatization: an economic analysis. MIT, CambridgeGoogle Scholar
  33. Vickers J, Yarrow G (1991) Economic perspectives on privatization. J Econ Perspect 5(2):111–132CrossRefGoogle Scholar
  34. Vives X (2001) Oligopoly pricing: old ideas and new tools. MIT, CambridgeGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Institute of EconomicsUniversity of St. GallenSt. GallenSwitzerland
  2. 2.Department of Business AdministrationUniversity of ZurichZurichSwitzerland

Personalised recommendations