INCOMPLETE CONTRACTS AND PRIVATIZATION

The paper offers a selective survey on the incomplete contracts approa ch to privatization. Furthermore, a simple model of privatization to a n owner-manager is developed in which different allocations of ownersh ip rights lead to different allocations of inside information about th e firm which in turn affect allocative and productive efficiency. In t his model, privatization is a commitment device of the government to c redibly reward the manager for a successful cost reduction and to hard en his budget constraint.