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Privatization, Risk-Taking, and the Communist Firm

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  • Dominique Demougin
  • Hans-Werner Sinn

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4205.

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Date of creation: Mar 1995
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Handle: RePEc:nbr:nberwo:4205

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  1. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June.
  2. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November.
  3. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
  4. Joseph E. Stiglitz, 1973. "Incentives and Risk-Sharing in Sharecropping," Cowles Foundation Discussion Papers 353, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Bennett, John & Maw, James, 2000. "Privatisation and market structure in a transition economy," Journal of Public Economics, Elsevier, vol. 77(3), pages 357-382, September.
  2. Maw, James, 2002. "Partial privatization in transition economies," Economic Systems, Elsevier, vol. 26(3), pages 271-282, September.
  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. 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.
  5. 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.
  6. Pennings, Enrico, 2008. "Privatization of real options," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 489-497, September.
  7. 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.
  8. Bennett, John & Maw, James, 2003. "Privatization, partial state ownership, and competition," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 58-74, March.
  9. Hans-Werner Sinn & Alfons J. Weichenrieder, 1997. "Foreign direct investment, political resentment and the privatization process in eastern Europe," Economic Policy, CEPR & CES & MSH, vol. 12(24), pages 177-210, 04.

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