PRIVATIZATION POLICY AND COST-REDUCING INVESTMENT BY THE PRIVATE SECTOR

The purpose of this paper is to investigate how privatization affects the cost-reducing investment by the private sector. We compare the private sector's investment levels between mixed oligopoly and pure oligopoly. We show that privatization increases the cost-reducing investment when the market demand is sufficiently large, while it reduces the cost-reducing investment when the market demand is sufficiently small. Our results imply that the impact of privatization on the private sector's technological efficiency strongly depends on the market environment. Moreover, we examine several extensions.