A study of optimal state shares in mixed oligopoly: Implications for SOE reform and foreign competition

This article studies the optimal state share in a partially state-owned enterprise (SOE) from the perspectives of a social planner and a transition-economy government that is under pressure to provide employment. In a mixed-oligopoly model, we find that when the SOE is cost inefficient relative to the private firm, the effects of employment burden on the optimal state shares are different between the government and social planner. Whilst the government's optimal response to increasing employment pressure is to raise state shares, the socially efficient solution implies a reduction in the state share. In effect, the state share that maximizes the government's payoff is too high from the social perspective. Furthermore, as tariff falls and foreign competition intensifies, the social planner always wants to reduce the state share but the government does not want to do that if the SOE is sufficiently inefficient. Somewhat surprisingly, the SOE's output may rise as foreign competition intensifies, although such increase is against social efficiency. Finally, our analysis suggests that given the employment burden, the government might resist complete free trade once the initial liberalization is achieved.