On insider privatization

Privatization is proceeding slowly in many Eastern European countries. This is largely because the insiders, who currently have control but not property rights to the firms, oppose outsider privatization. Privatization would proceed faster if governments decided to go the insider privatization route. There would seem to be two strong efficiency arguments for doing so. First, insider privatization aligns control and property rights. This gives the right incentives to insiders. Second, if for some reason, insiders cannot do the job themselves, they will have the right incentives to sell the firms to those outsiders who can. Our paper focuses on this second argument. We conclude that it is not as obvious as it seems. There is a wedge between the value of the firm to insiders and the value of the firm to outsiders. Depending on the details of insider privatization, and on the details of the resale process, this wedge may prevent resale, and thus prevent desirable restructuring.