Economic integration and privatisation under diseconomies of scale

In this paper we analyse whether it should be national governments that decide whether to privatise public firms (non-integration) or whether this decision should be delegated to a supra-national authority (economic integration). We assume that two countries form a single market in which there is free trade and that each country has one public firm and n private firms. We show that, if the supra-national authority decides whether or not to privatise public firms, aggregated politically weighted welfare is no less than if the governments take this decision. We also show that aggregated politically weighted welfare is no less if the firms are owned by the governments rather than a supra-national authority.