THE COSTS AND BENEFITS OF PRIVATIZATION - AN INCOMPLETE CONTRACTS APPROACH

This article develops a model of privatization using an incomplete con tracts approach. We argue that different allocations of ownership righ ts lead to different allocations of inside information about the firm, which in turn affect both allocative and productive efficiency. Priva tization is seen as a commitment device of the government to credibly threaten to cut back subsidies if costs are high in order to give mana gers better cost-saving incentives (a ''harder budget constraint''). T he cost of privatization is that allocative efficiency is distorted.