The Political Economy of Mass Privatization and the Risk of Expropriation

CEPR Discussion Paper No. 1542

Posted: 19 Mar 1997

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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Date Written: January 1997

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 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.

JEL Classification: D72, L33

Suggested Citation

Schmidt, Klaus M., The Political Economy of Mass Privatization and the Risk of Expropriation (January 1997). CEPR Discussion Paper No. 1542, Available at SSRN: https://ssrn.com/abstract=34516

Klaus M. Schmidt (Contact Author)

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Centre for Economic Policy Research (CEPR)

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