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The Political Economy of Mass Privatization and the Risk of Expropriation

  • Schmidt, Klaus M.

The privatization process in Eastern Europe is not irreversible. Future governments may want to expropriate successful private firms by increasing taxation or by renationalizing them in order to subsidize unsuccessful firms. The paper uses a simple median voter model to predict the policy of future governments. It is shown that there will be less expropriation the more shares are distributed free to the population. It is better to distribute shares equally across the population rather than to give them to insiders of each firm. Furthermore, people should be discouraged from selling their shares for cash. The threat of expropriation adversely affects investment and restructuring efforts. It is shown that a mass privatization scheme which includes substantial free distribution of shares may induce more investment, higher expected profits and higher privatization revenues for the government than a policy that relies exclusively on selling shares to the highest bidder.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1542.

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Date of creation: Jan 1997
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Handle: RePEc:cpr:ceprdp:1542
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  1. Schmidt,Klaus & Schnitzer,Monika, 1992. "Privatization and management incentives in the transition period in Eastern Europe," Discussion Paper Serie A 374, University of Bonn, Germany.
  2. Roland, Gerard & Verdier, Thierry, 1994. "Privatization in Eastern Europe : Irreversibility and critical mass effects," Journal of Public Economics, Elsevier, vol. 54(2), pages 161-183, June.
  3. 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.
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