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Delegation and Delay in Bank Privatization

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  • Lorand Ambrus-Lakatos
  • Ulrich Hege

Abstract

The 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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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp181.pdf
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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 181.

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Length: pages
Date of creation: 01 Jul 1998
Date of revision:
Handle: RePEc:wdi:papers:1998-181

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Keywords: bad loans; delegated signing; delayed recapitalization;

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Cited by:
  1. 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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