Working Paper: NBER ID: w7206
Authors: Aaron Tornell
Abstract: In the first part of this paper we argue that three reforms must be implemented if privatization is to increase efficiency. First, establishing unitary control rights within the firm. Second, making privatized firms face hard budget constraints. Third, establishing a non-corruptible judicial system and transparent bankruptcy procedures. The question arises as to what course of action should be undertaken when these reforms have not been undertaken and privatizers have only a small window of opportunity? Either they privatize hastily today, or not at all. Should they go ahead with privatization and hope that the newly privatized firms will create the demand for good laws? In the case of behemoths, the answer is not clear cut. Privatization without prior implementation of the three reforms mentioned above will simply replace government bureaucrats with private mafias (i.e., private groups with the power to extract fiscal transfers). These private mafias might behave more voraciously than the bureaucrats they are replacing, reducing aggregate efficiency and further hindering the growth of the competitive private sector. In the second part we address the more traditional issues of auction design and of restructuring and regulation of monopolies with network externalities.
Keywords: No keywords provided
JEL Codes: D23; H11; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Privatization with reforms (unitary control rights, hard budget constraints, non-corrupt judicial system) (L33) | Increased efficiency (D61) |
| Privatization without reforms (L33) | Inefficiencies (D61) |
| Privatization of small shops (L33) | Growth of the competitive private sector (O17) |
| Privatization of large behemoths without reforms (L33) | Hindered growth (O13) |
| Divided control among stakeholders (G34) | Lack of incentive for technological adoption (O39) |
| New owners unable to implement efficient production decisions (D22) | Milking effect (F16) |