Privatisation and market structure in a transition economy

A model is developed in which an industry of N greater than or equal to 1 f irms is privatised. The 'participation' method of privatisation is used, wh ereby firms are sold for cash, but the state retains a proportionate share of ownership. In each firm the new private owner has the opportunity to mak e a reorganisational investment, before output is produced. This investment is unobservable by the state, and therefore non-contractible, There is Cou rnot competition in the product market. The welfare-maximising retained own ership share for the state is analysed, taking into account that potential buyers of firms may have limited access to finance. (C) 2000 Elsevier Scien ce S.A. All rights reserved.