A Contractual Analysis of State versus Private Ownership

Abstract

This paper provides a unique contractual analysis of privatization from a state-owned company to a privately-owned company. Using a contractual approach, we analyze the advantages and disadvantages of private ownership versus state ownership under various circumstances. Our analyses focus on three aspects: external risk, internal governance, and relative importance of the owner versus managers. We provide both theoretical and empirical analyses. Our empirical analysis supports our theoretical findings. Our focus on the change in ownership is particularly relevant to the recent debate on nationalizing banks in the wake of the subprime mortgage crisis.