SFB 303 Discussion Paper No. A - 547

Author: Lülfesmann, Christoph
Title: When Should We Privatize? An Incomplete Contracts Approach
Abstract: The paper compares efficiency in public and private enterprises in an incomplete contracting framework. Under each organizational mode, the manager of the firm can invest in the development of an innovative production technology. While this new technology is always efficient, its implementation incurs costs on the manager who therefore prefers a prevailing basic technology. In case that the basic technology remains viable, a switch in technologies may thus require to renegotiate the manager's contract. We show that the firm should remain under public governance if it is ex ante unlikely that the basic technology remains viable. Conversely, privatization is optimal in reverse situations. Interestingly, privatization can turn out to be optimal although (a) the government is purely benevolent, (b) the economic environment in either regime is identical, and (c) the government cannot commit ex ante to an ex post inefficient behavior.
Keywords: Privatization, Incomplete Contracts, Innovative Technologies
JEL-Classification-Number: D23, H57, L51
Creation-Date: May 1998 (revised) 
URL: ../1998/a/bonnsfa547.pdf"

SFB 303 Homepage

18.08.1998, Webmaster