The privatization model to an owner-manager: an incomplete contracts approach
The privatization model to an owner-manager: an incomplete contracts approach

Summary/Abstract: The paper offers a simple model of privatization to an owner-manager, which is a variant of Schmidt (1996). The model uses an incomplete contract approach and analyzes the impact of different ownership on manager’s incentives. In this model, different allocations of ownership rights lead to different allocations of inside information about the firm that in turn affect allocation and production efficiency. Furthermore, privatization is a commitment device of the government to credibly reward the manager for a successful cost reduction. The model proves that privatization to the ownermanager is preferable to nationalization because it gives higher, not just production efficiency like in Schmidt’s model, but allocation efficiency as well.

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