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

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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.

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