The Political Economy of Mass Privatization and the Risk of Expropriation

European Economic Review, Vol. 44, No. 2, December 17, 1999

Posted: 2 Feb 2000

See all articles by Klaus M. Schmidt

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

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Abstract

One of the most important determinants of success for large-scale privatization programmes is the long-term commitment of the government to refrain from discretionary interventions that lead to an ex-post expropriation of the returns of the industry. However, future governments may want to expropriate successful private firms by increasing taxation or by renationalizing them in order to subsidize unsuccessful firms. In the model expropriation serves two purposes: it redistributes wealth from capital owners to workers, and it insures the workers against the risk that their company fails and they become unemployed. 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 for 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.

Note: This is a description of the paper, and is not the actual abstract.

JEL Classification: D72, L33

Suggested Citation

Schmidt, Klaus M., The Political Economy of Mass Privatization and the Risk of Expropriation. European Economic Review, Vol. 44, No. 2, December 17, 1999, Available at SSRN: https://ssrn.com/abstract=205628

Klaus M. Schmidt (Contact Author)

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Centre for Economic Policy Research (CEPR)

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