Why Do Governments Award Monopoly Rights to Privatized Telephone Firms and What are the Consequences?

Bruno Viani

Carow Hall, Conference
June 01, 2004, 08:00 PM to 07:00 PM

Abstract:

WHY DO GOVERNMENTS AWARD MONOPOLY RIGHTS TO PRIVATIZED TELEPHONE FIRMS AND WHAT ARE THE CONSEQUENCES? I use an original dataset of 149 privatization sales of dominant telephone firms in 74 countries in the period 1984-2003 to answer the following questions: (1) Why do governments award monopoly rights to privatized firms? and (2) How does this choice affect government revenues and the availability of telephone services? The search for answers to the first question is framed as a result of competition between two groups: Business users (i.e., the taxed group) and residential users (i.e., the subsidized group). This model is enhanced by adding government financial constraints and political institutions. I find that financially constrained governments are more likely to award monopoly rights, and award longer periods of monopoly to the privatized firms than less constrained governments. Special-interest groups affect this decision. As the usage of telephone services by businesses increases, governments are less likely to award monopoly rights and award shorter periods of monopoly. In a similar way, as the residential usage of telephone services increases, governments are more likely to award monopoly rights and award longer periods of monopoly. Political preferences and institutions matter. Countries with a right-wing chief executive whose party also controls the legislature are less likely to award monopoly rights and award shorter periods of monopoly than countries with divided or non market oriented governments. Long lasting democracies are also less likely to award monopoly rights and award shorter periods of monopoly than unstable democracies or autocratic systems. Granting monopoly rights has real consequences. On the one hand, governments that award monopoly rights raise more revenues than those that do not. On the other hand, users of basic telephone services are hurt. Countries in which governments award monopoly rights exhibit less usage of basic telephone services in the post-privatization years than countries in which entry is permitted.

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