WHAT are THE COSTs and benefits OF PRIVATIZATION?

Marek Kapicka

Politická ekonomie, 2000, vol. 2000, issue 2

Abstract: The article analyzes the issue of privatization from theoretical point of view. An incomplete contracts approach is used in the analysis. Formal model is presented, showing how contractual incompleteness affects the extent of restructuring. The conclusion is, that if the government cannot commit not to subsidize the firm in exchange for higher production, restructuring effort will be lower than optimal. The reason is that higher restructuring decreases future subsidies. The government thus creates soft budget constraint for the owner. However, privatization improves upon state ownership. If we introduce partial privatization, more complicated governance structures emerge. Rights to cash-flow and rights to control are distinguished. One of the principal conclusions is that these rights are highly complementary. Privatization should therefore include transfer of both of these rights toward the new owner.

Keywords: privatization; incomplete contracts; contract theory; bargaining (search for similar items in EconPapers)
Date: 2000

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