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|
|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.