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 Design
JEL-Classification-Number: 026, 619
Creation-Date: May 1990
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