How Stakes in Restructuring Put Restructuring at Stake

In a model where privatization of inefficient SOE's is performed by allocating shares to different types of agents in society we analyze the conflict between shareholder and stakeholder interests. In particular, some of those that receive shares in a firm that suffers from inefficiency do have a stakeholder interest in the same inefficiency. Additionally, we introduce a dependence of agent (and hence firm) decisions on the entire privatization program: for one type of share/stakeholder the effect with which inefficiency enters his stakeholder interest can switch sign depending on the overall economic structure that results from privatization. The paper determines the effects on restructuring (elimination of the inefficiency) in a general share/stakeholder conflict setup. It is found that for sensible specifications of the conflict restructuring will fall short of complete efficiency. The dependence of one agent's stakeholder function of the overall privatization structure can amplify this effect. Further, we introduce a privatizing government that in this setup maximizes an objective function, taking into account the overall restructuring level and political support from the distribution of shares