DP2571 | Liability for Past Environmental Contamination and Privatization

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26/09/2000

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Abstract

This paper examines the role of liability for past environmental contamination in the privatization processes of Central and Eastern Europe. The theoretical section establishes a link between a risk-averse investor?s amount of information regarding the extent of past environmental contamination (and its cleanup costs) and the investor?s willingness to pay for a particular enterprise, i.e., bid. As the investor obtains a more precise estimate of the uncertain cleanup costs, the investor faces less risk; therefore, the investor?s risk premium falls and the investor?s bid rises. This link generates four hypotheses regarding a privatization agency?s responses to the investor?s knowledge of cleanup costs. The empirical section of this paper proposes to test these hypotheses with forthcoming analysis using data from the Czech Republic.