Political Incentives to Privatize

The scope of the public sector (i.e. what activities are undertaken by public rather than private entities) is a decision made by politicians. While there are economic costs and benefits to privatization, there is also a political benefit to incumbents: By privatizing today, politicians transfer future revenues (when they might not be in office) to the present. This political benefit leads to over-privatization. We show that this political benefit persists even if politicians are able to borrow against public assets. We analyze the relationship between privatization and over-privatization with the political environment, as well as complete a normative analysis of the costs and benefits to society of allowing politicians to privatize assets. ∗Assistant Professor, Harris School of Public Policy, 1130 E. 60th Street, Chicago, IL 60637 †MPP Candidate, Harris School of Public Policy, 1130 E. 60th Street, Chicago, IL 60637