A positive theory of give-away privatization

We make a first step towards a positive theory of privatization, in a framework similar to the one of Shleifer and Vishny's “Politicians and Firms” (QJE, 1994). In our model, a government may want to privatize because privatization can provide managers with stronger incentives to exert effort and more managerial effort may help to maintain jobs that otherwise would be destroyed. However, the government trades off better managerial incentives with the costs of losing control, here, over funds that the government provides for the restructuring of firms. We also show that if managers care for the size of their firm, privatization may weaken, not strengthen incentives.