How does government ownership affect firm performance? A simple model of privatization in transition economies

We present a game-theoretical model of privatization in transition economies. We consider the costs and benefits of government ownership and derive the net effect of government ownership on firm performance. Model predictions are consistent with empirical evidence in the literature. ► The government and the firm play a two-period Stackleberg game. ► The government helps the firm reduce its cost of capital through “policy lending”. ► The government induces excess employment in state-owned enterprises. ► The net effect of government ownership on firm performance is negative. ► Privatization lowers government ownership in firms and improves firm performance.