Privatization Versus Managerial Delegation: Revisiting Delegation in a Mixed Duopoly

ABSTRACT This study revisits the issue of managerial delegation in a mixed oligopoly by focusing on whether a private firm's managerial delegation can increase firm profit and social welfare. Unlike the previous research that has focused on the effect of privatization on social welfare, we examine the impact of managerial delegation by a private firm on profit and social welfare. Using a model in which the degrees of partial privatization and managerial delegation are endogenously determined in a mixed duopoly, we derive the equilibrium degrees and demonstrate the following results. First, partial privatization is always chosen instead of full privatization or nationalization and the equilibrium degree of privatization is not monotonic with the cost‐efficiency parameter. Second, profit‐maximizing behavior is never chosen as a managerial delegation strategy. When marginal cost does not rise sharply with production, the private firm's owner incentivizes its manager toward a higher production cost so that the manager chooses the firm's output level more aggressively. Third, managerial delegation necessarily increases social welfare, whereas whether it increases the private firm's profit depends on the cost‐efficiency parameter. When marginal cost does not rise sharply with production, a managerial delegation strategically implemented by a private firm not only increases private benefits but also contributes to enhancing public interest.