Creating owners: insider privatization and its consequences

1999 ◽  
pp. 35-57
Keyword(s):  
Insider Privatization

scholarly journals Endogena korupcija kao ravnoteza sekvencijalne igre

2003 ◽  
Vol 44 (156) ◽  
pp. 21-43
Author(s):  
Milic Milovanovic
Keyword(s):  
Working Conditions ◽  
Perfect Information ◽  
Equilibrium Strategy ◽  
Backward Induction ◽  
Power Struggle ◽  
Extensive Form ◽  
Sequential Game ◽  
Privatized Firms ◽  
Motivational Structure ◽  
Insider Privatization

In this paper power struggle over the control of an insider privatized firm is modeled as a sequential game with perfect information. The endogenous corruption is a consequence of an insider privatization plan, where employees obtain majority of shares. In the post privatization game three players are dominant: managers, employees, and outside owners. Managers are by far the strongest player, with their key position in privatized firms despite their minority ownership stake. Since managers control working conditions of employees-cum-owners, they exercise an unparalleled power. Motivational structure is given for each player. Their ranked lists of goals and fears are necessary in order to specify parameters for the model. The game is modeled in an extensive form, and backward induction suggests a coalition of insiders (managers and employees) against the interests of outsiders. Under stated conditions, the equilibrium strategy results in an endogenous corruption.

On insider privatization

1996 ◽  
Vol 40 (3-5) ◽  
pp. 759-766 ◽  
Author(s):  
O. Blanchard ◽  
P. Aghion
Keyword(s):  
Insider Privatization

Privatizing Rural China: Insider Privatization, Innovative Contracts and the Performance of Township Enterprises

2003 ◽  
Vol 176 ◽  
pp. 981-1005 ◽  
Author(s):  
Hongbin Li ◽  
Scott Rozelle
Keyword(s):  
Local Government ◽  
Local Governments ◽  
Rural China ◽  
Firm Level ◽  
Policy Makers ◽  
Book Value ◽  
The World ◽  
Privatized Firms ◽  
Privatization Process ◽  
Insider Privatization

This article examines the privatization of China's township enterprises. According to our survey of 670 firms in 15 randomly selected counties in Jiangsu and Zhejiang provinces, more than half of the firms owned by local government were completely privatized by 1999. The privatization process is striking for two reasons. First, local governments almost always sold firms to insiders, while in the rest of the world privatization largely involves outsiders. Secondly, unlike the predictions of some academics and policy makers, many privatized firms have experienced an increase in performance. Drawing on firm-level survey data and extensive interviews with government leaders and managers, we found that leaders devised a way to elicit information from the buyer at the time of the sale about the firm's future profitability that enabled them to execute privatization successfully. Our analysis shows that the performance of firms with new owners that paid a price for the firm that exceeded the book value of its assets is on par with the performance of private firms after privatization since they also received strong incentives.

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