Transaction Costs of Privatization

There are two arguments that speak in favor of privatizing the SOEs in the transforming economies: first, the enforcement of a hard budget constraint as a central condition for the coherence of a market economy. Second, efficiency gains may be expected from privatization of the state economic sector due to the incentive and sanction structure of private ownership-to the extent that no external effects occur. The issue of ownership, the last chapter concluded, can be discussed meaningfully only in a world with transaction costs. While the transaction costs of private and public ownership regimes have been dealt with at length in the economic discussion, the transaction costs of privatization itself have not yet been analyzed. In the privatization discussion, these costs have thus far either been completely neglected (Sachs 1991; Lipton/Sachs 1991; Vaubel 1992) or given merely marginal consideration in ad hoc arguments (Kornai 1991). It is frequently assumed in the privatization debate that it is free to transform ownership regimes and that the primary distribution of property rights can be neutral for allocative efficiency:

“The Coase Theorem tells us that allocative efficiency does not depend on how property rights are initially distributed. This means that, from the economic point of view, it does not matter how firms are privatized-whether they are sold or given a away to whom. (…) The Coase Theorem assumes zero transaction costs. In the case of property rights over capital this simplification does not seem exorbitant” (Vaubel 1992, 112).