SFB 303 Discussion Paper No. A - 287
Author: Schmidt, Klaus M.
Title: The Costs and Benefits of Privatization
Abstract: The paper argues that the allocation of ownership rights affects
the distribution of information. This can explain some differences in
efficiency between a nationalized and a privatized firm. Suppose the
government wants to commit to a subsidy scheme which gives some cost-
saving incentives to the management but which is inefficient ex post.
Under nationalization this scheme is not credible because it will be
renegotiated. However, under privatization the government is less
informed about the costs of the firm. Therefore an ex post inefficient
subsidy scheme becomes optimal to limit the imformational rent of the
private owner. Although the production level is distorted ex post this
may be desirable ex ante to give better incentives to the management.
The tradeoff between allocative and productive efficiency determines
the costs and benefits of privatization.
Keywords: Privatization, Incomplete Contracts, Renegotiation, Mechanism
JEL-Classification-Number: 026, 619
Creation-Date: May 1990
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