SFB 303 Discussion Paper No. A - 330
Author: Schmidt, Klaus M.
Title: The Costs and Benefits of Privatization
Abstract: This paper investigates some differences in allocative and productive
efficiency between a privatized and a nationalized firm from an incomplete
contracts perspective. Suppose the government wants to commit to a subsidy
scheme which gives some cost-saving incentives to the management but is
inefficient ex post. Under nationalization this scheme is not credible.
However, under privatization the government is less informed about the costs
of the firm. Therefore an inefficient subsidy scheme becomes optimal to
limit the information rent of the private owner. Although production is
distorted ex post this may be desirable to give better ex ante incentives
to the management.
Keywords: Privatization, Incomplete Contracts, Mechanism Design, Renegotiation
JEL-Classification-Number: 026, 619
Creation-Date: February 1991
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