Incumbent employees’ resistance to implementing privatization policy

The recent anti-privatization trend in Latin America, France and South Africa, is a reminder that employees resist privatization, because pre-privatization firms tend to be over-manned and to pay excessive wages. We study the effect of employees’ resistance on the successful implementation of privatization in a stylized model in which the government interacts with employees of an unknown type. The analysis clarifies some of the difficulties associated with the implementation process. Furthermore, although common sense dictates that the government negotiates with the employees before finding an outside buyer, we show that sometimes it is better off contacting an investor first.