University of Michigan Gateway Ford School

CLOSUP Conferences

Privatization: Issues of State and Local Public Infrastructure

Ann Arbor, November 22, 2002

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Download the associated policy report (pdf).

Privatization and Labor Force Restructuring Around the World

Florencio Lopez-de-Silanes, Yale University and NBER
Alberto Chong, Inter-American Development Bank

Abstract
Critics of privatization argue that poor labor force restructuring is a key concern and that governments should establish better retrenchment programs. Using new data from a random sample of 400 companies in the world, we test competing theories about the wisdom of retrenchment programs and their effect on prices paid by buyers and rehiring policies by private owners after privatization. Our results show that adverse selection plagues retrenchment programs carried out by governments before privatization. Controlling for endogeneity, several labor retrenchment policies yield a negative impact on net privatization prices. In confirmation of the adverse selection argument, various types of voluntary downsizing lead to a higher probability of rehiring the same workers by the new private owners. Compulsory skill-based programs are the only type of program that is marginally associated with higher prices and lower rehiring rates after privatization, but the political and economic costs of this policy may make it somewhat unpractical. A qualified 'do not intervene' appears to be the safest bet in labor retrenchment before privatization.

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University of Michigan Gateway Ford School Gerald R. Ford School of Public Policy