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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