Some Doubts on the Property Rights Approach to Privatization : A Preliminary Note

This paper examines Hart, Shleifer & Vishny (QJE 1997)'s specification of the threat point under private ownership.Their threat point, unilaterally determined by a party with the right to control all assets in production, cannot be justified by the existing theories of optimal threat.A pair of the separation strategy (the maximin strategy) is rather a natural candidate for the optimal threat in the spirit of cooperative games including Nash bargaining solution.In the case of pubic goods, bargaining emerges from skills specific to some elements in the relationship rather than to assets in production even if a private firm has the right to control all assets.In other cases, unilateral determination of the threat point implies ex post monopoly of the private firm after specific investments, in spite of ex ante competitive auction of the contract.The latter situation is contradictory to the necessary condition for success of privatization.