Corruption and Privatization: The Efficiency of Worker Cooperatives


1 Department of Economics, University of Aix-Marseille University, France

2 Department of Economics, University of Tehran, Iran



The soft budget constraint tells us that because there is no strict relation between income and expenditure of state-owned firms, these firms do not have the incentive to increase their efficiency. The solution to this is privatization. However, because privatization creates opportunities for corruption, we see the reproduction of the soft budget constraint. Here, we articulate privatization as a principal-agent model. The principal may transfer public assets to three types of agents: corrupt, not corrupt, and worker cooperative. The characteristics of the worker cooperative agent are ascribed to the standard model of efficiency wage. The result is that the rate of cronyism was lower when the worker cooperative agent was introduced. This observation suggests that while the privatization to worker cooperatives cannot diminish corruption, it decreases corruption substantially. Furthermore, we also see that the efficiency of worker cooperatives is higher than investor-owned firms. The important conclusion from our study is that the corruption of privatization is partially for overcoming the incomplete information about the agents (new owners), and it is from this point that privatization to worker cooperatives can curb corruption. The higher efficiency of worker cooperatives compensates for incomplete information. We propose the privatization of worker cooperatives instead of investor-owned firms.