“A Dynamic Model of Privatization with Endogenous Post-Privatization Performance” by Jiahua CHE
Hong Kong University of Science and Technology
This paper presents a dynamic model of privatization, driven by improved institutional protection of property rights on the one hand, constrained by the buyer’s financial constraint on the other. Government ownership is more efficient than private ownership when property rights are insecure. Improved institutional protection of property rights over time brings the need to privatize. The buyer’s financial constraint affects the timing of privatization and the price of the firm, causing the firm performance in the short run either to deteriorate or to improve dramatically, and the firm to be priced both below the value of the firm and the buyer’s ability to pay. Partial privatization exacerbates the constraint rather than relieves it as commonly believed. Comparative statics shows that firms with high productivity under government ownership are privatized earlier than low productivity firms, that performance of the former never improves dramatically, whereas performance of the latter never deteriorates, and that among high productivity firms, the more productive a firm is, the earlier is it privatized, whereas among low productivity firms, the more productive a firm is, the later is it privatized. Implications for empirical analysis and policies are derived.