We present a model where a government chooses the number of individuals to which ownership in a former state-owned firm shall be allocated. When making this decision the government maximizes the political support it gets from the firm's incumbent manager and from potential shareholders, anticipating that a greater dispersion of shares reduces the control of the manager by the firm's new owners. It turns out that shares will be allocated to the maximum number of individuals - and thus a policy of mass privatization will be implemented - if the manager's utility enters the political support function with a higher weight than the welfare of the potential shareholders. The result of the political process, however, need not conflict with the objective of achieving a Pareto-optimal allocation. Thus we contradict a widely shared presumption that mass privatization schemes sacrifice efficiency to satisfy political constraints and show that they can be very attractive from an efficiency point of view.
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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number
475.
Length: Date of creation: Mar 1995 Date of revision: Handle: RePEc:bon:bonsfa:475
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Find related papers by JEL classification: L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
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