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Bank privatization in Argentina: A model of political constraints and differential outcomes

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  • Clarke, George R.G.
  • Cull, Robert

Abstract

Based on results from country case studies, many researchers have claimed that political constraints affect bank privatization transactions, which in turn affect the post-privatization performance of the banking sector. But no study has either econometrically tested how political constraints affect bank privatization transactions or theretically modeled the privatization transaction. The authors present a simple theoretical framework that models the inherent tradeoffs faced by governments and potential buyers in privatization transactions involving banks. The potential buyer is concerned about the probability that the bank will remain solvent, about the profits it will earn after privatization, and about the price paid for the assets and liabilities. The government is concerned about the price received for the assets, about layoffs, and about service coverage after privatization. The evidence from bank privatization transactions in Argentina in the 1990s supports several of their theoretical predictions. In particular, provinces with highfiscal deficits were willing to accept layoffs and to guarantee a larger part of the privatized banks'portfolio in return for a higher price. The tequila crisis (Mexico's economic crisis in 1994-95) meant that politicians could protect fewer jobs and had to assume a greater share of their public banks'assets. Evidence of better performance at banks privatized after Mexico's crisis suggests that, by tying politicians'hands, the crisis may have brought unforeseen benefits. This conjecture awaits further empirical validation, but the authors hope that by explicitly incorporating the incentives politicians face, analysis can begin to address the question of why some privatizations succeed more than others.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 78 (2005)
Issue (Month): 1 (October)
Pages: 133-155

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Handle: RePEc:eee:deveco:v:78:y:2005:i:1:p:133-155

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References

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  1. Shirley, Mary M & Xu, Lixin Colin, 1998. "Information, Incentives, and Commitment: An Empirical Analysis of Contracts between Government and State Enterprises," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 358-78, October.
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  15. Megginson, William L & Nash, Robert C & van Randenborgh, Matthias, 1994. " The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis," Journal of Finance, American Finance Association, vol. 49(2), pages 403-52, June.
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Citations

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Cited by:
  1. Arghya Ghosh & Partha Sen, 2012. "Privatization in a Small Open Economy with Imperfect Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(3), pages 441-471, 06.
  2. Loren Brandt & Hongbin Li & Joanne Roberts, 2004. "Why Do Governments Privatize?," Discussion Papers 00007, Chinese University of Hong Kong, Department of Economics.
  3. Cull, Robert & P. Spreng, Connor, 2008. "Pursuing Efficiency While Maintaining Outreach: Bank Privatization In Tanzania," Policy Research Working Paper Series 4804, The World Bank.
  4. Alberto Chong & Florencio de, 2003. "The Truth about Privatization in Latin America," Yale School of Management Working Papers ysm436, Yale School of Management.
  5. Clarke, George R.G. & Cull, Robert & Fuchs, Michael, 2007. "Bank privatization in Sub-Saharan Africa : the case of Uganda commercial bank," Policy Research Working Paper Series 4407, The World Bank.
  6. Uwe Vollmer & Diemo Dietrich & Ralf bebenroth, 2009. "Behold the 'Behemoth'. The privatization of Japan Post Bank," Discussion Paper Series 236, Research Institute for Economics & Business Administration, Kobe University.
  7. Claessens, Stijn & Perotti, Enrico, 2007. "Finance and inequality: Channels and evidence," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 748-773, December.

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