DP743 Privatization, Risk-Taking, and the Communist Firm

Author(s): Dominique Demougin, Hans-Werner Sinn
Publication Date: January 1993
Keyword(s): Communist Firm, Eastern Europe, Privatization, Risk-taking
JEL(s): D44, P13
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=743

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 giveaway scheme, and it may even share the cash sales' virtue of incentive compatibility.