When will privatization maximize the government's net revenues?

A government sells assets to raise revenues or promote economic efficiency. But when its capital is durable, it might wish to sell it right away in order to avoid inventory costs.  Knowing this, potential buyers may wait for the government to cut its price, since they realize that as a monopoly it will initially price above marginal cost.  Ronald Coase conjectured that the price would fall instantly to marginal cost. This would deprive the government of net revenues.

Rather than sell, the government could continue to lease the capital to the public – that is, to sell the services that the capital generates, in exchange for a tax payment.  For example, the government could provide treated water or electrical power.  Comparative statics of the model in this paper indicate that a government maximizing its net revenues may prefer leasing to selling for many capital-intensive products that buyers view as vital. 

Consider a socialist government contemplating a transition to markets – a transition which requires it to sell such assets as factories and industries.  It must consider the impact of this privatization on its own revenues.  If its major products are capital-intensive, then privatization might cut its revenues relative to the amount that it could have raised had it continued to provide services generated by the assets in exchange for a tax price.  So the government might delay the market transition.

Similarly, pressure on a government to sell assets quickly in order to settle its debts may weaken its financial position over the longer run.