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The Costs and Benefits of Privatization

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Author Info

  • Klaus M. Schmidt

Abstract

The paper argues that the allocation of ownership rights affects the distribution of information. This can explain some differences in efficiency between a nationalized and a privatized firm. Suppose the government wants to commit to a subsidy scheme which gives some cost- saving incentives to the management but which is inefficient ex post. Under nationalization this scheme is not credible because it will be renegotiated. However, under privatization the government is less informed about the costs of the firm. Therefore an ex post inefficient subsidy scheme becomes optimal to limit the imformational rent of the private owner. Although the production level is distorted ex post this may be desirable ex ante to give better incentives to the management. The tradeoff between allocative and productive efficiency determines the costs and benefits of privatization.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 287.

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Date of creation: May 1990
Date of revision:
Handle: RePEc:bon:bonsfa:287

Contact details of provider:
Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Privatization; Incomplete Contracts; Renegotiation; Mechanism Design;

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