Asset Stripping, Rule of Law and Firm Survival: The Hoff-Stiglitz Model and Mass Privatization in Montenegro

21 Pages Posted: 21 Dec 2013

See all articles by Matjaz Koman

Matjaz Koman

University of Ljubljana

Milan Lakicevic

College of Economics

Janez Prašnikar

University of Ljubljana - Faculty of Economics

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA; CEPR; IZA; CERGE-EI; University of Ljubljana

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Abstract

We provide the first test of the Hoff and Stiglitz (2004) model predicting whether and under what conditions mass privatizations are accompanied by asset stripping. In addition to directly testing the theory, we also tackle an important policy-oriented issue of why a large number of efficient firms disappeared during mass privatization in a booming economy of Montenegro. Econometrically, we present the first study to look at firms that disappeared during a mass privatization transition, improving upon prior studies that focused only on existing firms and assumed away survival bias.Our analysis suggests that asset stripping and firm disappearance were present, and that asset stripping was a likely reason for the loss of efficient firms. We show that because more productive firms were liquidated, it is important to model survival bias in the selection of firms remaining in samples when estimating the effects of privatization or other ownership changes. We also show that one needs to distinguish between true start-ups and liquidated firms that re-appear as start-ups. In the absence of the rule of law, many firms that appear to have disappeared were in fact appropriated by managers and politically connected individuals.

Keywords: comparison of public and private enterprises, socialist systems and transitional economies, socialist enterprises and their transitions

JEL Classification: L33, P24, P31

Suggested Citation

Koman, Matjaz and Lakicevic, Milan and Prašnikar, Janez and Svejnar, Jan, Asset Stripping, Rule of Law and Firm Survival: The Hoff-Stiglitz Model and Mass Privatization in Montenegro. IZA Discussion Paper No. 7821, Available at SSRN: https://ssrn.com/abstract=2370787 or http://dx.doi.org/10.2139/ssrn.2370787

Matjaz Koman (Contact Author)

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

Milan Lakicevic

College of Economics ( email )

Cetinjska br.2
Podgorica, 81 000
Montenegro

Janez Prašnikar

University of Ljubljana - Faculty of Economics

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA ( email )

420 West 118th Street
New York, NY 10027
United States

CEPR

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United Kingdom

IZA

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CERGE-EI

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HOME PAGE: http://www.cerge-ei.cz

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

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