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The Political Economy of Mass Privatization and the Risk of Expropriation

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  • Klaus M. Schmidt

Abstract

The privatization process in Eastern Europe is not irreversible. Future governments may want to (partially) expropriate successful private firms in order to subsidize unsuccessful ones. We use a simple median voter model to predict the policy of future governments. It is shown that there will be less expropriation the more shares were distributed for free to the population. Diversified mass privatization is better than insider privatization. Furthermore, people should be discouraged to sell their shares for cash. Finally, we show that some free distribution of shares may, induce more investment and increase expected profits and privatization revenues for the government.

Suggested Citation

  • Klaus M. Schmidt, 1998. "The Political Economy of Mass Privatization and the Risk of Expropriation," William Davidson Institute Working Papers Series 136, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:1998-136
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    References listed on IDEAS

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    1. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819.
    2. Schmidt Klaus M. & Schnitzer Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 264-287, June.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
    4. Banks,Jeffrey S. & Hanushek,Eric Allen (ed.), 1995. "Modern Political Economy," Cambridge Books, Cambridge University Press, number 9780521478106.
    5. Banks,Jeffrey S. & Hanushek,Eric Allen (ed.), 1995. "Modern Political Economy," Cambridge Books, Cambridge University Press, number 9780521472333.
    6. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589833.
    7. 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.
    8. 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.
    9. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589826.
    10. Laban, Raul & Wolf, Holger C, 1993. "Large-Scale Privatization in Transition Economies," American Economic Review, American Economic Association, vol. 83(5), pages 1199-1210, December.
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    More about this item

    Keywords

    mass privatization; transition; expropriation; political economy;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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