Privatization and Restructuring: An Incomplete-Contract Approach

If an enterprise is restructured prior to privatization, underinvestment in restructuring is very likely. This is a special hold-up problem in privatization. Efficient restructuring can be attained if it is performed by either the buyer or a cash-revenue maximizing privatization agency. Both-sided efficient restructuring can never be achieved, neither by at-will contracts, nor by option contracts, by a special renegotiation design or by a setting where one party restructures before the contract has been signed. The worst scenario is a privatization agency which maximizes political support. This agency may even decide to privatize firms with negative value.