In this paper power struggle over the control of an insider privatized firm is modeled as a sequential game with perfect information. The endogenous corruption is a consequence of an insider privatization plan, where employees obtain majority of shares. In the post privatization game three players are dominant: managers, employees, and outside owners. Managers are by far the strongest player, with their key position in privatized firms despite their minority ownership stake. Since managers control working conditions of employees-cum-owners, they exercise an unparalleled power. Motivational structure is given for each player. Their ranked lists of goals and fears are necessary in order to specify parameters for the model. The game is modeled in an extensive form, and backward induction suggests a coalition of insiders (managers and employees) against the interests of outsiders. Under stated conditions, the equilibrium strategy results in an endogenous corruption.
Why do privatized firms pay higher dividends?
