NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Privatization, Risk-Taking, and the Communist Firm

Dominique Demougin, Hans-Werner Sinn

NBER Working Paper No. 4205 (Also Reprint No. r1954)
Issued in November 1992
NBER Program(s):   PE

This paper studies alternative methods of privatizing a formerly communist firm in the presence of imperfect risk markets. The methods include cash sales, a give-away scheme, and a participation contract where the government retains a sleeping fractional ownership in the firm. It is shown that, with competitive bidding, the participation contract dominates cash sales because it generates both more private restructuring investment and a higher expected present value of revenue for the government. Under weak conditions, the participation contract will induce more investment than the giveaway scheme, and it may even share the cash sales' virtue of incentive compatibility.

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Document Object Identifier (DOI): 10.3386/w4205

Published: Journal of Public Economics, Vol. 55, no.2 pp. 203-231, October 1994 citation courtesy of

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