Corruption and positive selection in privatization

We consider the supply of a public good based on a publicly owned facility. The Government has a choice between provision in-house and privatizing the facility and then outsourcing the production. In particular, we focus on corruption in the decision to privatize and on its effect on social welfare when there is asymmetric information on the public and private manager's efficiency. Our analysis shows that a corrupt Government, that chooses to privatize only in exchange for a bribe, makes a positive selection on the private firm's efficiency and, thus, may have a positive effect on social welfare.

► We model the privatization of a public-owned facility needed to provide a service.
► Private provision (that requires privatization) is compared to in-house provision.
► We show that corruption in the privatization process can improve welfare.
► Corruption works a positive selection when the manager's efficiency is private information.