THE TRANSITION TO FREE MARKETS - WHERE TO BEGIN PRIVATIZATION

This essay models the sequencing of privatization within an industry a nd across industries. When a primary advantage of private over public ownership is more responsiveness to information about consumer demand and input costs, then privatization should begin where uncertainty or ignorance is greatest and in areas that transmit information to other agents. Privatizing middlemen has particular value when neighboring se ctors are also private. If the retail sector is private, then privatiz ation downstream usually dominates privatization upstream. Industries facing elastic demand should be privatized first when there is uncerta inty about costs. J. Comp. Econom., February 1996, 22(1), pp. 23-42. H arvard University, Hoover Institution, and NBER, Cambridge, Massachuse tts 02138; and University of Chicago, Chicago, Illinois 60637. (C) 199 6 Academic Press, Inc.