This paper examines an economy in which output is produced by state-owned enterprises and private firms. Private-capital formation requires intermediation that is subject to a credit market friction. In this environment, I look at the effects of a privatization policy that transfers state-owned capital to the private sector. Multiple steady-state equilibria are possible. When these arise, the low-wage equilibrium features a relatively inefficient financial system and privatization transfers help to increase the aggregate capital stock by reducing the severity of the credit market frictions. On the other hand, privatization transfers may have adverse effects when the economy is at the high-wage equilibrium. Analysis of the dynamic characteristics of the model reveals that development trap phenomenon and endogenous fluctuations can be observed.
Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions
