Why and When Do Governments Initiate Public Enterprise Reform?

Initiating public enterprise reform is a complex decision influencedby economic factors as well as the ideological biases and personalitiesof political leaders. Nevertheless, the use of a contractingframework yields important generalizations about what drivesthe decision. This article argues that the decision dependsfundamentally on the potential efficiency gains from the reformand its associated transactions costs. Costs arise because ofasymmetries in information and opportunism, problems that usuallyplague contract negotiations. The article identifies observablevariables that may affect either the potential gains or thetransactions costs, uses them to construct a simple probit decision-makingmodel, and tests the model using data from fifteen developingcountries over a twenty-year period.