ABSTRACT
The transformation of Eastern Germany’s economic framework has largely depreciated the capital stock of the firms there. Since the currency union with Western Germany, the firms held by the Treuhandanstalt have been making large losses, and these have continued to grow. The survival of Eastern German firms could be ensured only by making them competitive, which could be accomplished only by investing substantial sums in their rehabilitation. The Treuhandanstalt for the most part decided against financing rehabilitation itself, opting instead for a “privatization of rehabilitation” (Treuhandanstalt 1991d, 4) This strategy entailed substantial subsidies for private investors in the form of price rebates and negative prices. In terms of welfare economics, these subsidies can be justified only if the rehabilitation investments are expected to give rise to positive external effects.1 This chapter will examine neither the welfare-economic effects of rehabilitation investments nor their influence on the factor combinations chosen. Instead, the chapter will seek to analyze the transaction costs involved in concluding privatization contracts containing provisions on rehabilitation subsidies. It is assumed for the sake of simplicity that the Treuhandanstalt was familiar with the social benefits of rehabilitation investment, though it can just as well be assumed that the matter has been settled by a political decision.
