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Privatization and Managerial Efficiency

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  • Olivier Debande
  • Guido Friebel

Abstract

We investigate the privatization decision of a government whose objectives are to preserve jobs and to stabilize its budget. The firm considered needs restructuring, i.e. some funds must be provided and the manager must undertake an effort to reorganize the firm. If the productivity of the manager is unknown to the government, privatization involves a trade-off between better managerial incentives and a loss of control: productive managers restructure since they receive the profits of the firm, but unproductive managers shirk and deviate the funds to unproductive uses. This gives rise to a soft budget constraint, and the preservation of employment may become more expensive to the government than in state ownership.

Suggested Citation

  • Olivier Debande & Guido Friebel, 1997. "Privatization and Managerial Efficiency," William Davidson Institute Working Papers Series 39, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1997-39
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39429/3/wp39.pdf
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    Cited by:

    1. Bennedsen, Morten, 1999. "Political Ownership," Working Papers 11-1999, Copenhagen Business School, Department of Economics.
    2. 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.
    3. Thorsten Janus, 2009. "Aid and the Soft Budget Constraint," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 264-275, May.
    4. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March.
    5. Bennedsen, Morten, 2000. "Political ownership," Journal of Public Economics, Elsevier, vol. 76(3), pages 559-581, June.

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