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State Owned Firms: Private Debt, Cost Revelation and Welfare
PICARD, Pierre M.; RUSLI, Ridwan


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Keywords :
State-owned firms; privatization; debt; information asymmetry
Abstract :
[en] In this paper we study the role of private debt financing in disciplining a state owned firm operating for a government that incurs a cost of public financing. We show that debt contracts allow the government to avoid socially costly subsidies by letting unprofitable state- owned firms default. Debt is never used when the firm and government share the same information about the firm. By contrast, when the state-owned firm has private information, the government has an incentive to use debt to reduce the firm's information rents. We identify the conditions under which a positive debt level benefits governments. They depend on the cost of public funds, the interbank funding rate, the share of foreign investors, the level and uncertainty of the firm's cost.
Disciplines :
Author, co-author :
PICARD, Pierre M. ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA)
RUSLI, Ridwan 
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Title :
State Owned Firms: Private Debt, Cost Revelation and Welfare
Publication date :
Publisher :
Center for Research in Economic Analysis, University of Luxembourg
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since 10 December 2013


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