Privatization in Vertically Related Markets: Insights from a General Equilibrium Approach*

Abstract

A three-sector general equilibrium model is built to investigate how deepening privatization of an up-stream state-owned enterprise (SOE) influences the whole economy in developing economy. The SOE, facing privatization, owns a monopolistic position in upstream market and offers an essential interme-diate input for downstream manufacturing sector. After the privatization, the SOE improves its efficien-cy. We conclude the efficiency-enhancing effect is crucial for determining the impacts of privatization and provide a new perspective for analyzing this issue. Deepening privatization lowers (raises) price of the intermediate input and increases its output if the efficiency-enhancing effect is relatively large (small). When the effect is moderate, an increase in the privatization level raises the output of manu-facturing and agricultural and improves social welfare.