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What are the costs and benefits of privatization?

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Author Info

  • Marek Kapička

Abstract

The article analyzes the issue of privatization from theoretical point of view. An incomplete contracts approach is used in the analysis. Formal model is presented, showing how contractual incompleteness affects the extent of restructuring. The conclusion is, that if the government cannot commit not to subsidize the firm in exchange for higher production, restructuring effort will be lower than optimal. The reason is that higher restructuring decreases future subsidies. The government thus creates soft budget constraint for the owner. However, privatization improves upon state ownership. If we introduce partial privatization, more complicated governance structures emerge. Rights to cash-flow and rights to control are distinguished. One of the principal conclusions is that these rights are highly complementary. Privatization should therefore include transfer of both of these rights toward the new owner.

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Bibliographic Info

Article provided by University of Economics, Prague in its journal Politická ekonomie.

Volume (Year): 2000 (2000)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:prg:jnlpol:v:2000:y:2000:i:2:id:129

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Related research

Keywords: privatization; contract theory; incomplete contracts; bargaining;

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Cited by:
  1. Karel Janda, 2006. "Lender and Borrower as Principal and Agent," Working Papers IES 2006/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2006.

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