The Alignment of Interests of the “Private Sector” and the Citizens During a Transition Period in Transition Economies

ABSTRACT

The ownership of over 1600 firms in the Czechoslovak Socialist Republic has been transferred to the private sector in the early 90’s. Twelve years later, less than 5% of the firms are still public companies and it is estimated that the assets of over 90% of the firms have been stripped and sold to various operators [1-5]. When governments decided to privatize state owned enterprise and distribute shares to the citizens, it needs to solve two problems. The first is how to level the playing field for the disadvantaged citizens, who are less sophisticated and too diverse to organize against expropriation by others. The second is to obtain new financing for the privatized firms. We propose an original scheme in which the less sophisticated citizens make ‘sidecar’ investment along side the sophisticated, but with a right to redeem their shares. The scheme assures the citizens do not misallocate funds to less valuable firms, or pay more than what the sophisticated pay. It also align the interests of the citizens and the sophisticated investors such as investment funds.