Reforming state enterprises in socialist economies : guidelines for leasing them to entrepreneurs

Abstract

Since the state has proven to be incompetent in its management of state owned enterprises a new structure must be found that takes into account the incompetence of the state but ensures that the state's economic interests are preserved the best way possible. Two of the most difficult tasks in this process are how to exercise ownership rights to assets and simultaneously delegate decision making to the management of the firm. This paper finds that the solution of these problems is to lease state owned enterprises to entrepreneurs through contracts derived from the principal-agent literature where the state is the principal and the agent is the lessee. Since the state needs to delegate responsibility to the management of state owned enterprises, the process of reform becomes in reality a principal-agent problem. To facilitate the reform process it is necessary to establish a credit market because the lessee may have investment plans that need to be financed. So far no country has yet tried to implement lease schemes based on principal-agent contracts. Future work needs to build a bridge between theory and reality to see whether they both can benefit from the interaction.Health Economics&Finance,International Terrorism&Counterterrorism,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies