The choice of privatization method in a transition economy when insiders control a firm

In many transition economies, insiders controlled firms. We model the decision about privatization method, focusing on the choice between mass privatization and management-employee buyout. We incorporate a political feasibility constraint that the revenue-maximizing government cannot pay insiders to take firms off its hands. Although mass privatization apparently conflicts with revenue maximization, we show that it may be the preferred method for a firm, and if so will be complementary with the state continuing to own shares. Mass privatization is more likely to be chosen if the government is politically weak.