The effect of privatization on wealth distribution in Russia

The paper considers the Russian privatization process and examines how its deviation from the competitive sale standard was likely to affect wealth in equality. (Privatization here is defined narrowly as the transfer of existi ng assets from government ownership to private hands.) While empirical eval uation is all but impossible due to the dearth of reliable data, it is feas ible to analyze the institutional features of Russian privatization in term s of their effect on redistribution of wealth. The paper argues that the mo st relevant and interesting issue is to evaluate privatization's distributi onal consequences relative to the informal pre-reform property rights. In l ight of this, privatization is modelled as a rent-seeking contest with incu mbency advantage of enterprise managers who initially held the greatest inf ormal rights over assets. The rent-seeking contest is shown to strongly mag nify this pre-reform wealth inequality reflected in the incumbency advantag e. In addition, the paper analyzes the distributional consequences for various wealth groups of the differences in the composition of their pre-reform in formal wealth, most importantly a relatively large share of housing assets in the wealth of the poor. The effect of wealth redistribution on economic growth in Russia is also discussed.