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Priorities and Sequencing in Privatization

Theory and Evidence from the Czech Republic

Jan Svejnar, Nandini Gupta, John Ham

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While privatization of state-owned enterprises has been one of the most important aspects of the economic transition from a centrally planned to a market system, no transition economy has privatized all its firms simultaneously. This raises the question of whether governments privatize firms strategically. In this paper we examine theoretically and empirically the determinants of the sequencing of privatization. To obtain testable predictions about factors that may affect sequencing, we develop new theoretical models and adapt existing ones. In doing so we characterize potentially competing government objectives as i) maximizing efficiency through resource allocation; ii) maximizing public goodwill from the free transfers of shares to the public; iii) minimizing political costs; iv) maximizing efficiency through information gains and v) maximizing privatization revenues. Next, we use firm-level data from the Czech Republic to test the competing theoretical predictions about the sequencing of privatization. We find strong evidence that more profitable firms were privatized first. This suggests that the government sequenced privatization in a way that is consistent with our theories of maximizing revenue and maximizing public goodwill. Our findings are consistent with Glaeser and Scheinkman's (1996) recommendations for increasing efficiency through informational gains. They are inconsistent with the government pursuing the objective of increasing Pareto efficiency through improved resource allocation. They are also inconsistent with the hypothesis that the government minimized political costs. Our results also suggest that many empirical studies of the effects of privatization on firm performance suffer from selection bias since privatized firms are likely to have characteristics that make them more profitable than firms that remain in state ownership.

About the Authors

Jan Svejnar
James T. Shotwell Professor of Global Political Economy; Director, Center on Global Economic Governance
School of International and Public Affairs, Columbia University

Jan Svejnar focuses on the effects of government policies on firms, labor and capital markets; corporate, national, and global governance and performance; and entrepreneurship.

Professor Svejnar previously served as director of the International Policy Center at the Gerald R. Ford School of Public Policy at the University of Michigan. He is a founder and Chairman of CERGE-EI in Prague (an American-style Ph.D. program in economics that educates economists for Central-East Europe and the Newly Independent States). He serves as the Chairman of the Supervisory Board of CSOB Bank and co-editor of Economics of Transition. He is a Fellow of the European Economic Association and Research Fellow of the Center for Economic Policy Research (London) and Institute for the Study of Labor (IZA, Bonn).

Professor Svejnar was honored for his distinguished work with a 2012 Neuron Prize from the Prague-based Karel Janeček Endowment for Research and Science. He was one of three honorees for lifelong achievement, a recognition considered to be the Czech Republic's most prestigious for science. The Endowment spokesperson stated:

Prior to joining Columbia University in 2012, Professor Svejnar taught at the University of Michigan, University of Pittsburgh, and Cornell University. He received his B.S. from Cornell University’s School of Industrial and Labor Relations and his M.A. and Ph.D. in Economics from Princeton University.

Nandini Gupta
Assistant Professor of Finance
Kelley School of Business, Indiana University

John Ham
Professor of Economics
University of Maryland

John Ham received his BA from the University of Toronto and his PhD from Princeton University. Ham is currently a Research Associate at IZA and at the Institute for Research on Poverty at the University of Wisconsin. He has held permanent faculty positions at Toronto, Pittsburgh, Ohio State, and USC, and has been a visitor at Northwestern, Penn, Princeton, and the New York Fed. He is currently an Associate Editor at the Journal of Econometrics and at Labour Economics, and has served on the NSF Review Panel. His research is in the general area of applied microeconomics, and specifically in labor economics, public economics, health economics, and experimental economics. Currently he is studying eating disorders as addictive behavior with Michelle Goeree and Daniela Iorio, as well as the impact of State Enterprise Zones and Federal Empowerment Zones and Enterprise Communities on disadvantaged labor markets with Ayse Imrohoroglu and Charles Swenson. He is also studying movements of disadvantaged single mothers in and out of employment, and the movements of children across private health insurance, public health insurance, and no health insurance, with Xianghong Li and Lara Shore-Sheppard. Finally, he is working on estimating intertemporal labor supply elasticities in an implicit contract model with Kevin Reilly. He has received several grants from the NSF and NIH, and has published a number of papers in the American Economic Review, Econometrica, the Journal of Political Economy and the Review of Economic Studies, as well as in other journals. His areas of interest include applied microeconomics, and specifically in labor economics, public economics, health economics, and experimental economics.

Publication Information

Type Network Paper
Program Privatization
Posted 09/01/01
Download 210kb pdf
# Pages 50