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Of the various means
of privatizing the communist firm, give-aways spread ownership widely
but perform poorly in introducing new management; competitive cash sales
maximize investment in restructuring but raise interest rates if
governments use privatization revenues for current expenditure; while
`participation' contracts entitle the government to a fixed percentage
of the firm's future profits in return for an equity endowment, which
frees investors' funds for restructuring. In Discussion Paper No. 743, Dominique
Demougin and Research Fellow Hans-Werner Sinn argue that the
government's share in the risk of failure may also reduce potential
investors' risk aversion, for which private markets are underdeveloped
in the countries concerned. In their competitive auction model, a
risk-neutral trust agency seeks to sell a firm to identical risk-averse
investors, who specify an offer price under cash sales or the ownership
fraction they require and the amount of equity they commit to invest
under participation. If the government can monitor reorganization
investment and enforce the commitment but has no voting rights, while
all parties have identical beliefs about the cash flow resulting from a
given volume of investment, the participation contract yields higher
expected revenues than cash sales. |