Abstract
The quality of corporate governance is influential to operating efficiency of a public firm and thereby affects the government’s privatization policies. Within a mixed duopoly market, this paper considers corporatization and related corporate governance improving in economic sense to show that the effects of public firm’s governance enhancement can be extracted out from the effects of privatization. More importantly, the optimal privatization policy should be a flexible instrument hinging on the extent of governance improvement. Scenarios with a less efficient or an equally efficient public firm are considered and the result holds in both scenarios. Hence policy implications apply.
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Notes
Coles et al. (2001) systematically reviewed research on corporate governance and corporate performance, and examined the key elements of their relationship.
See the World Bank’s viewpoint on reforming public utilities (World Bank 2014a).
Managerial delegation is an issue that has been discussed at length. Important studies have been done by Vickers (1985), Fershtman and Judd (1987), and Sklivas (1987). These works explain managers’ nonprofit-maximizing behavior where the control and ownership of firms are separate. These studies led the way for much research that broadened the field. For example, Jansen et al. (2007) and Ritz (2008) considered market share as part of managerial delegation; Wang et al. (2009) discussed delegation and strategic trade policy; Wang and Wang (2010) put the focus on vertical structures to see how delegation and the order of firms’ move affect input pricing. In an empirically conducted paper, Mavruk and Carlsson (2015) focused on how governance mechanism affects the behaviors of a manager.
The World Bank used the reform of public water utilities to show that the organizational reform must directly and concurrently deals with labor issues. It is because “many of the most serious efficiency and performance problems are rooted here” (World Bank 2014b).
See footnote 1.
The cost difference between public and private firms was pointed out by Matsumura (1998). He was concerned that neglect of cost difference in his paper might underestimate the benefits brought about by full privatization.
In finance, corporate governance is concerned primarily with the monitoring system in an asymmetric information framework (Tirole 2001), but that is not the key point in this paper. However, the literature of mixed oligopoly has not considered the improvement of governance no matter how the corporate governance is defined.
This study was based on the policy research report of the World Bank (1995). Shirley used to be a research manager tasked with competition policy, regulation, finance, public-sector management, and private-sector development of the World Bank from 1990 to 2001. She worked for the Work Bank from 1980 to 2001.
According to its financial report, its annual losses are around USD $3 million every year. It is hard for people living in the east part of Taiwan to get tickets, especially during big holidays. Moreover, it is not allowed to adjust the ticket fare unless it gains the approval from the Government.
These two papers provided detailed discussions on the corporatization and privatization of airports and how they affect governance. The worldwide trend of airport reform is one of the most notable examples of the evolution of public firms. Policy collaboration is extremely important and it can be seen that privatization is usually combined with other strategies to enable this evolution. Moreover, various kinds of reforms are needed to improve the efficiency of public firms through better governance. According to Gillen (2011), most US airports are owned by the government and operated privately. Singapore, Finland, and Sweden have a similar reform structure. Canada also adopts a similar method to lease its airports, but the difference is the leased airports are not run for profit. Hamburg (Germany), France, China, and Kansai (Japan) partially privatized their airports but the government owns majority shares, whereas Denmark, Austria, and Switzerland have airports that are partially privatized and allow majority private ownership. Some British airports and the airports of Australia and New Zealand are fully privatized.
Before the 1990s, the railway connecting York, Reid, and Edinburgh was run by the British government. But owing to poor corporate governance, the British government decided to privatize it. However, the problems persisted and even worsened. Private companies that took over the railway company found that it was not as profitable as they expected and soon abandoned it. For example, Connex abandoned its contract in 2003, GNER did the same in 2005, and the National Express also gave up its 10-year running rights in 2009 following the losses caused by the subprime crisis. Similar cases are not rare. Shirley (1999) provided more evidence to show that the policy of privatization could sometimes turn out to be a disaster. The reasons for the failure are many and quite a few ended up returning previously sold public firms to governments in a worse shape than they were before.
Numerous papers follow Matsumura (1998) and define partial privatization as this paper does. Bárcena-Ruiz and Garzón (2003) adopted a similar modeling method to explore merger of public and private firms with multiple products. Matsumura and Kanda (2005) followed Matsumura (1998) to examine the issue of entry and show that the optimal privatization policies in the short-run and in the long-run are different. Ohori (2006) used the same scenario to explore the optimal environmental tax and level of partial privatization in an international duopolistic market. Fujiwara (2007) did the same to elaborate the impact of differentiated products on the optimal level of privatization. Méndez-Naya (2008) shows that the merger paradox can be solved. Heywood and Ye (2009a) applied the setting to their analysis of delegation. Heywood and Ye (2009b) adopted this scenario in the field of R&D. Wang and Chen (2010) extended Matsumura’s model to an open economy. Ohori (2012) considered Matsumura’s model setting in a vertical structure to see how partial privatization affects environmental protection policies. Matsumura and Tomaru (2013) adopted this model setting to analyze the optimal tax-subsidy policies with excess burden of taxation.
If we let \( \left( {\eta_{i} - e} \right)hw = c_{i} g_{i} \), then the proportion of the cost cut down can be written as \( g_{i} = \frac{{\eta_{i} - e}}{{\eta_{i} }}. \) This assumes that the proportion of costs reduced is different for public and private firms. Maiti and Mukherjee (2013) also pointed out that the proportion of costs reduced can be the same for the firms.
Substituting into the second order derivative shows that \( \left. {\partial^{2} SW/\partial \theta^{2} } \right|_{{\theta = \theta^{*} }} = - \frac{{\left( {a + g - 4c_{0} + 3c_{1} } \right)^{4} }}{{\left( {a + g - 2c_{0} + c_{1} } \right)^{2} }} \) indicating that the second order condition is satisfied. Besides, it is meaningless if the public firm is not active in the market to discuss the optimal privatization and governance improving policies. Therefore, because \( q_{0} = a + g - 4c_{0} + 3c_{1} , \) it is assumed that \( a + g - 4c_{0} + 3c_{1} > 0 \). Therefore, the criterion for \( g_{a} \) is \( g_{a} > - a + 4c_{0} - 3c_{1} . \)
Since \( g \equiv ehw \), and \( c_{i} = \eta_{i} hw, \quad i = 0, 1 \), the criterion for \( g \) can be transformed into the requirement for the strength of cost-reduction effect. This is to say that \( g > - a + 4c_{0} - 3c_{1} \) can be rewritten as \( e > 4\eta_{0} - 3\eta_{1} - {\raise0.7ex\hbox{$a$} \!\mathord{\left/ {\vphantom {a {hw}}}\right.\kern-0pt} \!\lower0.7ex\hbox{${hw}$}} \). Note that this means that only when the cost-reduction effect is able to satisfy the minimum standard will the public firm become active.
Based on \( \left( {\partial SW/\partial g} \right) = \left( {a + g - c_{0} } \right), \) recall that to guarantee the public firm is active, it is assumed that \( a + g_{a} - 4c_{0} + 3c_{1} > 0. \) Thus, \( g > - a + 4c_{0} - 3c_{1} \), which can be rewritten as \( \left( {a + g - c_{0} } \right) > 3(c_{0} - c_{1} ) \). Then, because of \( c_{0} > c_{1} ,\left( {a + g - c_{0} } \right) > 0 \).
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Acknowledgments
We would like to thank Arijit Mukherjee, Toshihiro Matsumura, Yoshihiro Tomaru, Kazuhiko Kato and workshop participants at the University of Tokyo. This paper was presented at the 12th EBES Conference, Singapore; we would also like to thank the editor and two anonymous referees for their useful comments and constructive suggestions that have been included in the revisions. Leonard F. S. Wang gratefully acknowledges the financial support provided by the National Council of Taiwan under Grant NSC102-2410-H-390-003-MY2.
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Wang, L.F.S., Han, TD. Better governance matters optimal privatization policy. Eurasian Econ Rev 5, 189–206 (2015). https://doi.org/10.1007/s40822-015-0025-6
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DOI: https://doi.org/10.1007/s40822-015-0025-6