Delegation and Delay in Bank Privatization
AbstractThe paper explains why bank privatization in transition economies is frequently delayed in comparison to privatizing non-financial firms. In the model, the government inherits a distressed bank with bad loans to a representative non-financial firm. The firm will only abstain from wasteful opportunistic behavior if there is a credible to signal that its future budget constraint will be hard. If the government takes over the state-owned bank directly or re-capitalizes and privatizes it immediately, then signaling leads to excessive liquidation. Delay in privatization allows delegating the signaling and can be beneficial because the signaling distortion can be shifted across "types". The analysis assumes a political constraint to sell the state-owned bank to a domestic investor (shallow pockets), but shows also that a Pareto improvement can typically be achieved if a buyer with a deep pocket can be found (foreign investor), Policy implications concerning timing and scope of bank privatization are discussed.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 181.
Date of creation: 01 Jul 1998
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bad loans; delegated signing; delayed recapitalization;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
- P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
- P41 - Economic Systems - - Other Economic Systems - - - Planning, Coordination, and Reform
- P43 - Economic Systems - - Other Economic Systems - - - Finance; Public Finance
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- Abel, Istvan & Siklos, Pierre L., 2004. "Secrets to the successful Hungarian bank privatization: the benefits of foreign ownership through strategic partnerships," Economic Systems, Elsevier, vol. 28(2), pages 111-123, June.
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