Cooperation between governments to set up public firms

Abstract

This paper analyzes cooperation between governments to set up a public firm and decide what percentage of that firm each of them owns. A symmetric model is assumed, with two countries and one domestic private firm in each country. Firms produce a homogeneous good and have quadratic cost functions. The counterintuitive result emerges that there are two equilibria, in each of which one government has a higher percentage of ownership in the public firm than the other. We extend the analysis to consider other factors that may influence the distribution of ownership of the firm between the countries: Heterogeneous goods, constant marginal cost of production, inequality in the number of private firms existing in each country, and different numbers of consumers in each country.