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Mass Privatization, Management Control and Efficiency

  • Dieter B”s
  • Phillipp Harms

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.

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Date of creation: Mar 1995
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Handle: RePEc:bon:bonsfa:475
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  1. Schmidt, Klaus M. & Schnitzer, Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Munich Reprints in Economics 3400, University of Munich, Department of Economics.
  2. Aghion, Philippe & Blanchard, Olivier & Burgess, Robin, 1994. "The behaviour of state firms in eastern Europe, pre-privatisation," European Economic Review, Elsevier, vol. 38(6), pages 1327-1349, June.
  3. Roland, G. & Verdier, T., 1991. "Privatization in Eastern Europe: Irreversibility and Critical Mass Effects," DELTA Working Papers 91-21, DELTA (Ecole normale supérieure).
  4. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W., 1994. "Voucher privatization," Journal of Financial Economics, Elsevier, vol. 35(2), pages 249-266, April.
  5. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  6. Patrick Bolton, 1995. "Privatization and the separation of ownership and control: lessons from Chinese enterprise reform," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(1), pages 1-11, 03.
  7. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
  8. David Lipton & Jeffrey Sachs, 1990. "Privitization in Eastern Europe: The Case of Poland," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 293-342.
  9. Jean Tirole, 1991. "Privatization in Eastern Europe: Incentives and the Economics of Transition," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 221-268 National Bureau of Economic Research, Inc.
  10. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
  11. John S. Earle & Saul Estrin, 1995. "Alternative ownership forms: the impact on restructuring," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(1), pages 111-115, 03.
  12. Coughlin, Peter J. & Mueller, Dennis C. & Murrell, Peter, 1990. "A model of electroral competition with interest groups," Economics Letters, Elsevier, vol. 32(4), pages 307-311, April.
  13. David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
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