Large-Scale Privatization in Transition Economies

To explain the slow progress of mass privatization programs in eastern Europe, we present a model based on a positive spillover between aggregate privatization and the individual expected return to privatization, derived from a potential populist backlash if costly reforms do not bring forth sufficient aggregate privatization. The model allows for the simultaneous existence of a pessimistic zero-privatization trap and an optimistic full-privatization equilibrium defined by a critical mass of expected privatization. While both privatization subsidies and minimum-income guarantees can by themselves secure coordination on the optimistic equilibrium, the financing constraint may offset the direct effect.