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Privatization, Risk-Taking, and the Communist Firm

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  • Demougin, Dominique
  • Sinn, Hans-Werner

Abstract

This paper studies alternative methods of privatizing a formerly communist firm in the presence of imperfect risk markets. The methods include cash sales, a give-away scheme, and a participation contract where the government retains a sleeping fractional ownership in the firm. It is shown that with competitive bidding, the participation contract dominates cash sales because it generates both more private restructuring investment and a higher expected present value of revenue for the government. Under weak conditions the participation contract will induce more investment than the giveaway scheme, and it may even share the cash sales' virtue of incentive compatibility.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 743.

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Date of creation: Jan 1993
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Handle: RePEc:cpr:ceprdp:743

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Keywords: Communist Firm; Eastern Europe; Privatization; Risk-taking;

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References

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  1. Joseph E. Stiglitz, 1973. "Incentives and Risk-Sharing in Sharecropping," Cowles Foundation Discussion Papers 353, Cowles Foundation for Research in Economics, Yale University.
  2. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
  3. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  4. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November.
  5. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June.
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Citations

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Cited by:
  1. Maw, James, 2002. "Partial privatization in transition economies," Economic Systems, Elsevier, vol. 26(3), pages 271-282, September.
  2. Chen, Chien-Hsun & Mai, Chao-Cheng & Liu, Yu-Lin & Mai, Shin-Ying, 2009. "Privatization and optimal share release in the Chinese banking industry," Economic Modelling, Elsevier, vol. 26(6), pages 1161-1171, November.
  3. Walsh, Patrick Paul & Whelan, Ciara, 2001. "Firm performance and the political economy of corporate governance: survey evidence for Bulgaria, Hungary, Slovakia and Slovenia," Economic Systems, Elsevier, vol. 25(2), pages 85-112, June.
  4. Bodó, Péter, 1996. "Az ügynökprobléma néhány aspektusa az átmeneti gazdaságban
    [Some aspects of the agent problem in the transition economy]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 342-349.
  5. Sinn, Hans-Werner & Weichenrieder, Alfons J., 1997. "Foreign direct investment, political resentment and the privatization process in eastern Europe," Munich Reprints in Economics 19562, University of Munich, Department of Economics.
  6. Banerji, Sanjay & Errunza, Vihang R., 2005. "Privatization under incomplete information and bankruptcy risk," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 735-757, March.
  7. John Bennett & James Maw, 1998. "Privatisation and Market Structure in a Transition Economy," William Davidson Institute Working Papers Series 175, William Davidson Institute at the University of Michigan.
  8. Pennings, Enrico, 2008. "Privatization of real options," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 489-497, September.
  9. Bennett, John & Maw, James, 2003. "Privatization, partial state ownership, and competition," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 58-74, March.
  10. Bennett, John & Estrin, Saul & Maw, James, 2007. "The choice of privatization method in a transition economy when insiders control a firm," European Journal of Political Economy, Elsevier, vol. 23(3), pages 806-819, September.

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