Privatisation and Market Structure in a Transition Economy

Abstract

A model is developed in which an industry of N > I firms is privatized. The 'participation' method of privatization is used, whereby 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 make a reorganisational investment, before output Is produced. The investment is unobservable by the state, and therefore noncontractible. Thae Is Cournot competition In the product market. The welfare-maximizing retained ownership share for the state is analyzed; taking into account that potential buyers of firms may have limited access to finance.