Modeling privatization as a firm strategy in transition economies

Worldwide, almost all state-owned enterprises (SOEs) face a critical choice: whether and when to privatize. An SOE's privatization choice is often complicated by the unique characteristics of transition economies. While market economies feature clearly defined and relatively stable rules of market competition and property rights, in transition economies these factors are evolving and uncertain. In this paper, we first distinguish between macro (economy-level) privatization and micro (firm-level) privatization, and then develop an optimal timing model for firm privatization, taking into consideration a number of important parameters, such as costs, pre- and postprivatization performance, uncertainty, risk considerations, and speed of postprivatization adjustment. We show that the choice of whether and when to privatize is a function of these parameters, which are in turn influenced by both external conditions and firm characteristics.