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DOES PRIVATIZATION FOSTER CHANGES IN THE QUALITY OF LEGAL INSTITUTIONS?

Authors


  • This article was previously circulated under the title “Does Privatization Lead to Institutional Change?” We appreciate the helpful comments and suggestions offered by Susan Christoffersen, Sylvain Dessy, Georges Dionne, Klaus Fischer, Jayant R. Kale (the editor), Naveen Khanna, Claude Laurin, Omrane Guedhami, Enrico Perotti, and an anonymous reviewer on previous versions. We also received valuable insights from seminar participants at HEC Montréal, the 2005 Northern Finance Association Conference, the 2005 CIRPÉE Conference, the 2006 Financial Management Association European Conference, and the 2006 Academy of International Business Conference. We gratefully acknowledge financial support from the Social Sciences and Humanities Research Council of Canada and Le Fonds Québécois de la Recherche sur la Société et la Culture.

Abstract

We analyze the effect of privatization on the quality of legal institutions of governance. Our findings suggest that large-scale privatization (in terms of progress and volume) increases the risk of corruption in developing countries but has no effect on the legal institutions of governance (i.e., law and order and investor protection). The method of privatization (public share issues versus private sales) helps curb corruption and improve the quality of law enforcement and of investor protection. In developed countries, the progress and volume of privatization reduce the risk of corruption, and the method of privatization enhances the quality of law enforcement.

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