The privatization of state owned enterprises was one of the most challenging tasks in the transition process. An important criterion for a successful privatization program is the appropriate allocation of control and cash flow rights among managers, workers and the public. In this problem set you will try to apply the property rights framework we learned in class to the Vladimir Tractor Factory in Russia. To read more about this fascinating but in many ways typical story, see Kapitalizm by Rose Brady pages 81-91,116-26,170-76, and 224-25. The book is on reserve in the Sawyer library.
In 1992, Mr. Anatoly Grishin had been the general director of the Vladimir Tractor Factory for 18 years. Under central planning, Mr. Grishin shared the control rights of the factory with the officials in the central planning office. With Gorbachev reforms and the collapse of communism, Mr. Grishin gained more control rights, giving him a status which he valued at 50 million rubles. Before privatization all profits are remitted to the state treasury - cash flow rights remain public. Currently the profits are zero. Suppose that it is possible to restructure the Vladimir Tractor Factory by reducing the factory size, improving management and selling unprofitable subsidiaries. The restructuring would increase profits to 200 million rubles, but it would dramatically reduce Mr. Grishin's status. Furthermore, the restructuring would lead to a layoff of 25% of the factory's 20,000 workers. Answer the following questions: