L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions; Privatization; Contracting OutReturn

This paper shows that the public firms can be more innovative and, thus, more efficient than the private firms. To verify this conclusion, a mixed duopoly is considered that allows both the public firm and the private firm to adopt a new technology with a positive fixed cost that reduces the marginal cost of production. The private firm maximizes profits while the public firm maximizes the weighed sum of the consumer and producer surpluses. In this framework, it is shown that if the cost of setting up a new technology takes an intermediate value when the weight of the consumer surplus in social welfare is high enough, the public firm is more innovative than the private one. Moreover, there is at least as much innovation in a mixed duopoly as in a private duopoly if the cost of setting up a new technology is high enough.