A partial list of the proposed constraints on government size includes balanced budget rules, tax reduction, fiscal decentralization and privatization. 1 Privatization transfers programs from the public sector to the private sector and has received great enthusiasm from many critics of growing government. This paper examines the ability of privatization efforts to control government size.
2. Model of privatization -government size relation
Two themes appear in the literature that suggest that privatization is effective in both economic and political arenas for shrinking government. The first theme is that it produces macro-output gains in a world characterized by budget-maximizing bureaucrats. 2 From research which finds that private production is more efficient than public production, substitution of production from budget-maximizing bureaucrats to profit-maximizing firms is argued to increase resource allocational efficiency. 3 The second theme is that it solves the special interest problem since it "gives" tangible goods to constituents at the same time as it reduces government spending. Through tax incentives, regulatory changes and asset-sales, privatization is argued to draw constituent support that counters special interests.
I assume that privatization includes only "load shedding," where government eliminates all responsibility for an activity. "Contracting-out" and "vouchers" retain some degree of government control. Missing from the literature is what effect privatization exerts on the government's ability to spend. 4 Consistent with Friedman (i978), governments are assumed to "spend what they receive plus what other else they can get away with. ''5 The total resources government consumes are given by the following short-term operating constraint: R = T + D, where R = total funding level, T = tax level and D = net debt issue. Setting expenditures E equal to the sum of funding sources, government consumes what government receives: E = R. To lower govern-