DP1542 The Political Economy of Mass Privatization and the Risk of Expropriation

Author(s): Klaus M. Schmidt
Publication Date: January 1997
Keyword(s): Expropriation, Mass Privatization, Political Economy, Transition
JEL(s): D72, L33
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1542

The privatization process in Eastern Europe is not irreversible. Future governments may want to expropriate successful private firms by increasing taxation or by renationalizing them in order to subsidize unsuccessful firms. The paper uses a simple median voter model to predict the policy of future governments. It is shown that there will be less expropriation the more shares are distributed free to the population. It is better to distribute shares equally across the population rather than to give them to insiders of each firm. Furthermore, people should be discouraged from selling their shares for cash. The threat of expropriation adversely affects investment and restructuring efforts. It is shown that a mass privatization scheme which includes substantial free distribution of shares may induce more investment, higher expected profits and higher privatization revenues for the government than a policy that relies exclusively on selling shares to the highest bidder.