Privatization, risk-taking, and the communist firm

Demougin, Dominique; Sinn, Hans-Werner (1994): Privatization, risk-taking, and the communist firm. In: Journal of Public Economics, Vol. 55, No. 2: pp. 203-231

Abstract

This paper studies alternative methods of privatizing a formerly communist firm in the presence of imperfect risk markets. The methods include cash sales, a give-away scheme, and a participation contract where the government retains a sleeping fractional ownership in the firm. It is shown that, with competitive bidding, the participation contract dominates cash sales because it generates both more private restructuring investment and a higher expected present value of revenue for the government. Under weak conditions, the participation contract will induce more investment than the give-away scheme, and it may even share the cash sales’ virtue of incentive compatibility.

• Item Type: Journal article
• Faculties: Economics; Economics > Chairs > Chair for Public Economics
• Subjects: 300 Social sciences > 330 Economics
• Language: English