Privatization, Risk-Taking, and the Communist Firm

Hans-Werner Sinn, Dominique Demougin

Journal of Public Economics 55, 1994, pp. 203-231; CESifo Working Paper No. 16, 1992; NBER Working Paper No. 4205, March 1995.


This paper studies alternative methods of privatizing a formerly communist firm in the presence of imperfect risk markets. The methods include cash sales, a give-away scheme, and a participation contract where the govemment retains a sleeping fractional ownership in the firm. lt is shown that, with competitive bidding, the participation contract dominates cash sales because it generates both more private restructuring investment and a higher expected present value of revenue for the govemment. Under weak conditions, the participation contract will induce more investment than the give-away scheme, and it may even share the cash sales' virtue of incentive compatibility.

Key words

Privatization; Risk theory; Economic transformation

JEL classification

P13; D44