Privatization, Risk-Taking, and the Communist Firm

36 Pages Posted: 10 Jul 2007 Last revised: 3 Apr 2022

See all articles by Dominique Demougin

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

Date Written: November 1992

Abstract

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.

Suggested Citation

Demougin, Dominique and Sinn, Hans-Werner, Privatization, Risk-Taking, and the Communist Firm (November 1992). NBER Working Paper No. w4205, Available at SSRN: https://ssrn.com/abstract=478687

Dominique Demougin (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany
+49 89 9224 1276 (Phone)
+49 89 9224 1409 (Fax)

HOME PAGE: http://www.cesifo.de

National Bureau of Economic Research (NBER)

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Ludwig Maximilian University of Munich (LMU)

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Munich, DE Bavaria 80539
Germany

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