Another definition is the purchase of all outstanding shares of a publicly traded company by private investors, or the sale of a state-owned enterprise or municipally owned corporation to private investors. In the case of a for-profit company, the shares are then no longer traded at a stock exchange, as the company became private through private equity; in the case the partial or full sale of a state-owned enterprise or municipally owned corporation
to private owners shares may be traded in the public market for the
first time, or for the first time since an enterprise's previous nationalization. The second such type of privatization is the demutualization of a mutual organization, cooperative, or public-private partnership in order to form a joint-stock company.
Etymology
The Economist magazine introduced the term "privatization" during the 1930s when it covered Nazi Germany's economic policy.
It is not clear if the magazine coincidentally invented the word in
English or if the term is a loanword from the same expression in German,
where it has been in use since the 19th century.
Definition
The
word privatization may mean different things depending on the context
in which it is used. It can mean moving something from the public sphere
into the private sphere, but it may also be used to describe something
that was always private, but heavily regulated, which becomes less
regulated through a process of deregulation.
The term may also be used descriptively for something that has always
been private, but could be public in other jurisdictions.
There are also private entities that may perform public
functions. These entities could also be described as privatized.
Privatization may mean the government sells state-owned businesses to
private interests, but it may also be discussed in the context of the
privatization of services or government functions, where private
entities are tasked with the implementation of government programs or
performance of government services. Gillian E. Metzger
has written that: "Private entities [in the US] provide a vast array of
social services for the government; administer core aspects of
government programs; and perform tasks that appear quintessentially
governmental, such as promulgating standards or regulating third-party
activities." Metzger mentions an expansion of privatization that
includes health and welfare programs, public education, and prisons.
History
Pre-20th century
The history of privatization dates from Ancient Greece, when governments contracted out almost everything to the private sector. In the Roman Republic private individuals and companies performed the majority of services including tax collection (tax farming), army supplies (military contractors), religious sacrifices and construction. However, the Roman Empire also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire.
Perhaps one of the first ideological movements towards privatization came during China's golden age of the Han Dynasty. Taoism came into prominence for the first time at a state level, and it advocated the laissez-faire principle of Wu wei (無為), literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the Renaissance, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty in China
began once more to practice privatization, especially with regards to
their manufacturing industries. This was a reversal of the earlier Song dynasty policies, which had themselves overturned earlier policies in favor of more rigorous state control.
In Britain, the privatization of common lands is referred to as enclosure (in Scotland as the Lowland Clearances and the Highland Clearances). Significant privatizations of this nature occurred from 1760 to 1820, preceding the industrial revolution in that country.
20th century onward
The first mass privatization of state property occurred in Nazi Germany
between 1933-37: "It is a fact that the government of the National
Socialist Party sold off public ownership in several state-owned firms
in the middle of the 1930s. The firms belonged to a wide range of
sectors: steel, mining, banking, local public utilities, shipyard,
ship-lines, railways, etc. In addition to this, delivery of some public
services produced by public administrations prior to the 1930s,
especially social services and services related to work, was transferred
to the private sector, mainly to several organizations within the Nazi
Party."
Great Britain privatized its steel industry in the 1950s, and the West German government embarked on large-scale privatization, including sale of the majority stake in Volkswagen to small investors in public share offerings in 1961. However, it was in the 1980s under Margaret Thatcher in the United Kingdom and Ronald Reagan
in the United States that privatization gained worldwide momentum.
Notable privatization attempts in the UK included privatization of Britoil (1982), Amersham International PLC (1982), British Telecom (1984), Sealink ferries (1984), British Petroleum (gradually privatized between 1979 and 1987), British Aerospace (1985 to 1987), British Gas (1986), Rolls-Royce (1987), Rover Group (formerly British Leyland, 1988), British Steel Corporation (1988), and the regional water authorities (mostly in 1989). After 1979, council house tenants in the UK were given the right to buy their homes (at a heavily discounted rate). One million purchased their residences by 1986.
Such efforts culminated in 1993 when British Rail was privatized under Thatcher's successor, John Major. British Rail had been formed by prior nationalization of private rail companies. The privatization was controversial, and the its impact is still debated today, as doubling of passenger numbers and investment was balanced by an increase in rail subsidy.
Privatization in Latin America flourished in the 1980s and 1990s
as a result of a Western liberal economic policy. Companies providing
public services such as water management, transportation, and telecommunication
were rapidly sold off to the private sector. In the 1990s,
privatization revenue from 18 Latin American countries totaled 6% of
gross domestic product.
Private investment in infrastructure from 1990 and 2001 reached $360.5
billion, $150 billion more than in the next emerging economy.
While economists generally give favorable evaluations of the impact of privatization in Latin America,
opinion polls and public protests across the countries suggest that a
large segment of the public is dissatisfied with or have negative views
of privatization in the region.
In the 1990s, the governments in Eastern and Central Europe
engaged in extensive privatization of state-owned enterprises in Eastern
and Central Europe and Russia, with assistance from the World Bank, the U.S. Agency for International Development, the German Treuhand, and other governmental and nongovernmental organizations.
Ongoing privatization of Japan Post
relates to that of the national postal service and one of the largest
banks in the world. After years of debate, the privatization of Japan
Post spearheaded by Junichiro Koizumi finally started in 2007. The privatization process is expected
to last until 2017. Japan Post was one of the nation's largest
employers, as one-third of Japanese state employees worked for it. It
was also said to be the largest holder of personal savings in the world.
Criticisms against Japan Post were that it served as a channel of
corruption and was inefficient. In September 2003, Koizumi's cabinet
proposed splitting Japan Post into four separate companies: a bank, an
insurance company, a postal service company, and a fourth company to
handle the post offices and retail storefronts of the other three.
After the Upper House rejected privatization, Koizumi scheduled nationwide elections
for September 11, 2005. He declared the election to be a referendum on
postal privatization. Koizumi subsequently won the election, gaining the
necessary supermajority and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.
Nippon Telegraph and Telephone's privatization in 1987 involved the largest share offering in financial history at the time. 15 of the world's 20 largest public share offerings have been privatizations of telecoms.
In 1988, the perestroika policy of Mikhail Gorbachev
started allowing privatization of the centrally planned economy. Large
privatization of the Soviet economy occurred over the next few years as
the country dissolved. Other Eastern Bloc countries followed suit after the Revolutions of 1989 introduced non-communist governments.
The United Kingdom's largest public share offerings were privatizations of British Telecom and British Gas during the 1980s under the Conservative government of Margaret Thatcher,
when many state-run firms were sold off to the private sector. The
privatization received very mixed views from the public and the
parliament. Even former Conservative prime minister Harold Macmillan was critical of the policy, likening it to "selling the family silver". There were around 3 million shareholders in Britain when Thatcher took office in 1979,
but the subsequent sale of state-run firms saw the number of
shareholders double by 1985. By the time of her resignation in 1990,
there were more than 10 million shareholders in Britain.
The largest public shares offering in France involved France Télécom.
Egypt undertook widespread privatization under Hosni Mubarak. He was later overthrown in the 2011 revolution, the public called for re-nationalization as the privatized firms were accused of practicing crony capitalism with the old regime.
Medicare and Medicaid managed care
In the United States, under the Medicare managed care
the government pays a managed care organization (MCO) a fixed amount
called the "capitated rate" for all medical services received by a
beneficiary in a given period. Enrollment in the programs has increased
substantially since 1990; in 2002 60% of Medicaid beneficiaries and 12%
of Medicare
beneficiaries were being treated by MCOs. Private sector involvement in
Medicare and Medicaid is not limited to MCOs; private doctors,
hospitals, nursing homes provide medical care; reimbursement claims are
processed by private intermediaries; and peer review organizations,
utilization review committees and accreditation organizations like JCAHO are staffed by private medical personnel.
Welfare privatization
Homeless
shelters and food banks are run by private organizations, who also
provide treatment services, operate Head Start programs and work with
child welfare agencies. Privatization of welfare system expanded in
1996, when the Aid to Families with Dependent Child (AFDC) program was
replaced with the Temporary Aid to Needy Families (TANF) program.
Welfare services that are often privatized include workforce
development, job training and job placement are often privatized.
Public education
There is also some private sector involvement in the public education system including charter schools, Educational Management Organizations (EMOs), and school voucher
programs. EMOs are usually for-profit and manage charter schools and
sometimes traditional public schools as well. The United States Supreme
Court upheld school voucher programs against an Establishment Clause challenge in Zelman v. Simmons-Harris.
Private prisons
In the US in 2001, private prison facilities housed 12.3% of all
federal prisoners and 5.8% of state prisoners. Contracts for these
private prisons regulate prison conditions and operation, but the nature
of running a prison requires a substantial exercise of discretion.
Private prisons are more exposed to liability than state run prisons.
Foreign affairs
Both for-profit and non-profit entities are tasked with various responsibilities related to the US foreign aid budget such as providing emergency humanitarian relief, development assistance, as well as post-conflict reconstruction
efforts. Similarly, private entities have started to perform tasks that
have traditionally been regarded as falling within the government's
diplomatic and military authority like participating in peace
negotiations, military training, intelligence gathering and other
security services or combat-related missions. Many of the military
interrogators at Abu Ghraib prison
were provided by a private contractor and lacked formal military
training; this was subsequently identified as a contributing factor to
detainee abuse at the prison by the Fay report.
The United Nations uses private subcontractors as well, and in
some cases, "failed states" have relied on private entities extensively
for a range of tasks including building critical infrastructure,
managing social services programs and using private military companies during the course of armed conflicts.
US Constitution
The United States Constitution only constrains state action and, with few exceptions, "erects no shield against merely private conduct, however discriminatory or wrongful". Gillian Metzger writes:
Adequately guarding against abuse of public power requires application of constitutional principles to every exercise of state authority, regardless of the formal public or private status of the actor involved: 'It surely cannot be that government, state or federal, is able to evade the most solemn obligations imposed in the Constitution by simply resorting to the corporate form' and thereby transferring operation of government programs to private hands...
Even if private actors can't be held accountable through the
traditional constitutional mechanism, they may be bound by other
regulatory or contractual requirements. Tort law
might be another avenue of protection, and some may argue that this
protection could be even more effective as public agencies and employees
usually enjoy some degree of immunity from civil liability.
Forms of privatization
There are five main methods of privatization:
- Share issue privatization: Shares sale on the stock market.
- Asset sale privatization: Asset divestiture to a strategic investor, usually by auction or through the Treuhand model.
- Voucher privatization: Distribution of vouchers, which represent part ownership of a corporation, to all citizens, usually for free or at a very low price.
- Privatization from below: Start of new private businesses in formerly socialist countries.
- Management buyout or employee buyout: Distribution of shares for free or at a very low price to workers or management of the organization.
The choice of sale method is influenced by the capital market
and the political and firm-specific factors. Privatization through the
stock market is more likely to be the method used when there is an
established capital market capable of absorbing the shares. A market
with high liquidity can facilitate the privatization. If the capital
markets are insufficiently developed, however, it would be difficult to
find enough buyers. The shares may have to be under priced, and the sales
may not raise as much capital as would be justified by the fair value
of the company being privatized. Many governments, therefore, elect for
listings in more sophisticated markets, for example, Euronext, and the London, New York and Hong Kong stock exchanges.
Governments in developing countries and transition countries
more often resort to direct asset sales to a few investors, partly
because those countries do not yet have a stock market with high
capital.
Voucher privatization occurred mainly in the transition economies in Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, privatization from below had made important contribution to economic growth in transition economies.
In one study assimilating some of the literature on
"privatization" that occurred in Russian and Czech Republic transition
economies, the authors identified three methods of privatization:
"privatization by sale", "mass privatization", and "mixed
privatization". Their calculations showed that "mass privatization" was
the most effective method.
However, in economies "characterized by shortages" and maintained
by the state bureaucracy, wealth was accumulated and concentrated by
"gray/black market" operators. Privatizing industries by sale to these
individuals did not mean a transition to "effective private sector
owners [of former] state assets". Rather than mainly participating in a
market economy, these individuals could prefer elevating their personal
status or prefer accumulating political power. Instead, outside foreign
investment led to the efficient conduct of former state assets in the
private sector and market economy.
Through privatization by direct asset sale or the stock market,
bidders compete to offer higher prices, generating more revenue for the
state. Voucher privatization, on the other hand, could represent a
genuine transfer of assets to the general population, creating a sense
of participation and inclusion. A market could be created if the
government permits transfer of vouchers among voucher holders.
Secured borrowing
Some privatization transactions can be interpreted as a form of a secured loan and are criticized as a "particularly noxious form of governmental debt". In this interpretation, the upfront payment from the privatization sale corresponds to the principal amount
of the loan, while the proceeds from the underlying asset correspond to
secured interest payments – the transaction can be considered
substantively the same as a secured loan, though it is structured as a
sale.
This interpretation is particularly argued to apply to recent municipal
transactions in the United States, particularly for fixed term, such as
the 2008 sale of the proceeds from Chicago parking meters for 75 years.
It is argued that this is motivated by "politicians' desires to borrow
money surreptitiously", due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.
Results
Literature reviews
find that in competitive industries with well-informed consumers,
privatization consistently improves efficiency. The more competitive the
industry, the greater the improvement in output, profitability, and
efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. Although typically there are many costs associated with these efficiency gains,
many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.
Yet, some empirical literature suggests that privatization could also
have very modest effects on efficiency and quite regressive distributive
impact. In the first attempt at a social welfare analysis of the
British privatization program under the Conservative governments of Margaret Thatcher and John Major during the 1980s and 1990s, Massimo Florio
points to the absence of any productivity shock resulting strictly from
ownership change. Instead, the impact on the previously nationalized
companies of the UK productivity leap under the Conservatives varied in
different industries. In some cases, it occurred prior to privatization,
and in other cases, it occurred upon privatization or several years
afterward.
A study by the European Commission
found that the UK rail network (which was privatized from 1994–97) was
most improved out of all the 27 EU nations from 1997–2012. The report
examined a range of 14 different factors and the UK came top in four of
the factors, second and third in another two and fourth in three, coming
top overall.
Privatizations in Russia and Latin America were accompanied by
large-scale corruption during the sale of the state-owned companies.
Those with political connections unfairly gained large wealth, which has
discredited privatization in these regions. While media have widely
reported the grand corruption that accompanied those sales, studies have
argued that in addition to increased operating efficiency, daily petty
corruption is, or would be, larger without privatization, and that
corruption is more prevalent in non-privatized sectors. Furthermore,
there is evidence to suggest that extralegal and unofficial activities
are more prevalent in countries that privatized less.
A 2009 study published in The Lancet
medical journal initially claimed to have found that as many as a
million working men died as a result of economic shocks associated with
mass privatization in the former Soviet Union and in Eastern Europe during the 1990s,
although a further study revealed that there were errors in their
method and "correlations reported in the original article are simply not
robust." Historian Walter Scheidel, a specialist in ancient history, posits that economic inequality and wealth concentration in the top percentile "had been made possible by the transfer of state assets to private owners."
In Latin America, there is a discrepancy between the economic
efficiency of privatization and the political/social ramifications that
occur. On the one hand, economic indicators, including firm
profitability, productivity, and growth, project positive microeconomic results. On the other hand, however, these results have largely been met with a negative criticism and citizen coalitions. This neoliberal criticism highlights the ongoing conflict between varying visions of economic development. Karl Polanyi
emphasizes the societal concerns of self-regulating markets through a
concept known as a "double movement". In essence, whenever societies
move towards increasingly unrestrained, free-market rule, a natural and
inevitable societal correction emerges to undermine the contradictions
of capitalism. This was the case in the 2000 Cochabamba protests.
Privatization in Latin America has invariably experienced
increasing push-back from the public. Some suggest that implementing a
less efficient but more politically mindful approach could be more
sustainable.
In India, a survey by the National Commission for Protection of Child Rights
(NCPCR) —Utilization of Free Medical Services by Children Belonging to
the Economically Weaker Section (EWS) in Private Hospitals in New Delhi,
2011-12: A Rapid Appraisal—indicates under-utilization of the free beds
available for EWS category in private hospitals in Delhi, though they
were allotted land at subsidized rates.
In Australia a "People's Inquiry into Privatisation" (2016/17)
found that the impact of privatisation on communities was negative. The
report from the inquiry "Taking Back Control" made a range of recommendations to provide accountability and
transparency in the process. The report highlighted privatization in
healthcare, aged care, child care, social services, government
departments, electricity, prisons and vocational education featuring the
voices of workers, community members and academics.
Opinion
Support
Studies show that private market factors can more efficiently deliver many goods or service than governments due to free market competition. Over time this tends to lead to lower prices, improved quality, more choices, less corruption, less red tape, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them, market failures and natural monopolies could be problematic. However, anarcho-capitalists prefer that every function of the state be privatized, including defense and dispute resolution.
Proponents of privatization make the following arguments:
- Performance. State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive.
- Increased efficiency. Private companies and firms have a greater incentive to produce goods and services more efficiently to increase profits.
- Specialization. A private business has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population.
- Improvements. Conversely, the government may put off improvements due to political sensitivity and special interests—even in cases of companies that are run well and better serve their customers' needs.
- Corruption. A state-monopolized function is prone to corruption; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. Corruption (or principal–agent issues) in a state-run corporation affects the ongoing asset stream and company performance, whereas any corruption that may occur during the privatization process is a one-time event and does not affect ongoing cash flow or performance of the company.
- Accountability. Managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas.
- Civil-liberty concerns. A company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies.
- Goals. A political government tends to run an industry or company for political goals rather than economic ones.
- Capital. Privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital.
- Security. Governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold.
- Lack of market discipline. Poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour.
- Natural monopolies. The existence of natural monopolies does not mean that these sectors must be state owned. Governments can enact or are armed with anti-trust legislation and bodies to deal with anti-competitive behavior of all companies public or private.
- Concentration of wealth. Ownership of and profits from successful enterprises tend to be dispersed and diversified -particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation.
- Political influence. Nationalized industries are prone to interference from politicians for political or populist reasons. Examples include making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies.
- Profits. Corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers to buy their products in preference to their competitors' (or by increasing primary demand for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. A company with good corporate governance will therefore be incentivized to meet the needs of its customers efficiently.
- Job gains. As the economy becomes more efficient, more profits are obtained and no government subsidies and less taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.
Opposition
Opponents of certain privatizations believe that certain public goods and services
should remain primarily in the hands of government in order to ensure
that everyone in society has access to them (such as law enforcement,
basic health care, and basic education). There is a positive externality when the government provides society at large with public goods and services such as defense
and disease control. Some national constitutions in effect define their
governments' "core businesses" as being the provision of such things as
justice, tranquility, defense, and general welfare. These governments'
direct provision of security, stability, and safety, is intended to be
done for the common good (in the public interest) with a long-term (for
posterity) perspective. As for natural monopolies, opponents of privatization claim that they aren't subject to fair competition, and better administrated by the state.
Although private companies will provide a similar good or service
alongside the government, opponents of privatization are careful about
completely transferring the provision of public goods, services and
assets into private hands for the following reasons:
- Performance. A democratically elected government is accountable to the people through a legislature, Congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives.
- Improvements. the government is motivated to performance improvements as well run businesses contribute to the State's revenues.
- Corruption. Government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally.
- Accountability. The public has less control and oversight of private companies.
- Civil-liberty concerns. A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened.
- Goals. The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole.
- Capital. Governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises.
- Cuts in essential services. If a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable.
- Natural monopolies. Privatization will not result in true competition if a natural monopoly exists.
- Concentration of wealth. Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good.
- Political influence. Governments may more easily exert pressure on state-owned firms to help implementing government policy.
- Profit. Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic. The more necessary a good is, the lower the price elasticity of demand, as people will attempt to buy it no matter the price. In the case of a price elasticity of demand of zero (perfectly inelastic good), the demand part of supply and demand theories does not work.
- Privatization and poverty. It is acknowledged by many studies that there are winners and losers with privatization. The number of losers—which may add up to the size and severity of poverty—can be unexpectedly large if the method and process of privatization and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to asset stripping).
- Job loss. Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company.
- Reduced wages and benefits. A 2014 report by In the Public Interest, a resource center on privatization, argues that "outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities."
- Inferior quality products. Private, for-profit companies might cut corners on providing quality goods and services in order to maximize profit.
Economic theory
In economic theory, privatization has been studied in the field of contract theory.
When contracts are complete, institutions such as (private or public)
property are difficult to explain, since every desired incentive
structure can be achieved with sufficiently complex contractual
arrangements, regardless of the institutional structure (all that
matters is who are the decision makers and what is their available
information). In contrast, when contracts are incomplete, institutions
matter. A leading application of the incomplete contract paradigm in the
context of privatization is the model by Hart, Shleifer, and Vishny (1997).
In their model, a manager can make investments to increase quality (but
they may also increase costs) and investments to decrease costs (but
they may also reduce quality). It turns out that it depends on the
particular situation whether private ownership or public ownership is
desirable. The Hart-Shleifer-Vishny model has been further developed in
various directions, e.g. to allow for mixed public-private ownership and
endogenous assignments of the investment tasks.
