Working Paper: CEPR ID: DP1542
Authors: Klaus M. Schmidt
Abstract: The privatization process in Eastern Europe is not irreversible. Future governments may want to expropriate successful private firms by increasing taxation or by renationalizing them in order to subsidize unsuccessful firms. The paper uses a simple median voter model to predict the policy of future governments. It is shown that there will be less expropriation the more shares are distributed free to the population. It is better to distribute shares equally across the population rather than to give them to insiders of each firm. Furthermore, people should be discouraged from selling their shares for cash.The threat of expropriation adversely affects investment and restructuring efforts. It is shown that a mass privatization scheme which includes substantial free distribution of shares may induce more investment, higher expected profits and higher privatization revenues for the government than a policy that relies exclusively on selling shares to the highest bidder.
Keywords: mass privatization; transition; expropriation; political economy
JEL Codes: 072; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wealth of the country (O57) | Degree of expropriation (H13) |
| Skewness of income distribution (D31) | Degree of expropriation (H13) |
| Risk aversion of the population (D11) | Degree of expropriation (H13) |
| Rigidity of the labor market (J48) | Degree of expropriation (H13) |
| More equitable distribution of shares (D33) | Degree of expropriation (H13) |
| More equitable distribution of shares (D33) | Investment incentives (G31) |
| Insider privatization (L33) | Degree of expropriation (H13) |
| Diversified mass privatization (L33) | Degree of expropriation (H13) |
| Mass privatization scheme with substantial free distribution of shares (P31) | Investment (G31) |
| Mass privatization scheme with substantial free distribution of shares (P31) | Expected profits (D33) |
| Mass privatization scheme with substantial free distribution of shares (P31) | Privatization revenues for the government (H82) |