The political economy of mass privatization and the risk of expropriation

The privatization process in Eastern Europe is not irreversible. Future gov ernments may want to (partially) expropriate successful private firms in or der to subsidize unsuccessful ones. We use a simple median voter model to p redict the policy of future governments. It is shown that there will be les s expropriation the more shares were distributed for free to the population . Diversified mass privatization is better than insider privatization. Furt hermore, people should be discouraged to sell their shares for cash. Finall y, we show that some free distribution of shares may induce more investment and increase expected profits and privatization revenues for the governmen t. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D72; L33.