- Credible privatization
- The American Economic Review
- Volume | Issue number
- 85 | 4
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
Privatization shifts residual income and control to private investors, restricting redistribution and improving incentives; thus rapid privatization should be desirable. Empirically, however, the transfer of ownership, as opposed to control, is very gradual. I offer an explanation based on investors' concern about future interference. A government averse to redistribution retains a passive stake in the firm; the willingness to bear residual risk signals commitment. When a large government stake conflicts with the transfer of control, underpricing may be necessary for separation. Finally, when the required discount is large, a committed government may prefer not to signal, gaining credibility over time.
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