Privatization in Eastern Europe. Irreversibility and critical mass effects

This paper proposes a model to shed light on two important policy features of privatization in Central and Eastern Europe: the idea of a necessary critical mass of privatization on one hand, and the great difficulties encountered in the actual privatization process on the other. The model incorporates a positive externality related to the size of the private sector. Multiple equilibria may arise for political and economic reasons. Policies of free distribution are analysed with the model. They may eliminate the danger of policy reversals due to excess unemployment, but may, at the same time, increase the relative cost of restructuring, leading in some cases to Pareto-inferior outcomes. © 1994.SCOPUS: ar.j