The Life Cycle of Government Ownership

Government ownership may dominate private ownership under government failure. Such dominance disappears as product markets grow mature, giving rise to the need for privatization. Buyers’ limited wealth imposes a constraint on how and when privatization takes place. In particular, firms may be underpriced during privatization, and privatization may take place at a sub-optimal timing which results in firm performances to deteriorate in the short run, and to improve only in the long run. Partial privatization may alleviate the constraint in some cases but exacerbates the efficiency loss in others. When the government is lesser an interventionist or when the product market grows mature very rapidly, privatization is likely to take place at a sub-optimal timing. The analysis is applied to the dynamics of the Chinese non-state sector.