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Political Incentives to Privatize

While there exists a large literature characterizing the political determination of the size of the government, much less attention has been paid to the political determination of the scope of government (i.e., what activities are undertaken by public rather than private entities). 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 overprivatization. We show that this political benefit persists even if politicians are able to borrow against public assets. We analyze the relationship between privatization and the political environment, as well as complete a normative analysis of the costs and benefits to society of allowing politicians to privatize assets.