Privatization and Managerial Efficiency

Abstract

We investigate the privatization decision of a government whose objectives are to preserve jobs and to stabilize its budget. The firm considered needs restructuring, i.e. some funds must be provided and the manager must undertake an effort to reorganize the firm. If the productivity of the manager is unknown to the government, privatization involves a trade-off between better managerial incentives and a loss of control: productive managers restructure since they receive the profits of the firm, but unproductive managers shirk and deviate the funds to unproductive uses. This gives rise to a soft budget constraint, and the preservation of employment may become more expensive to the government than in state ownership.