A fundamental question in economics and finance is whether and how removing barriers is associated with efficiency gains. We study this question using share issue privatization in China that took place through the split share structure reform as our experimental setting. Prior to the reform, domestic Ashares are divided into tradable and non-tradable shares with identical cash flow and voting rights. Under the reform, non-tradable share holders negotiate a compensation plan with tradable share holders in order to make their shares tradable. We develop a general equilibrium model to help understand the determinants of compensation and the source of gains in the process of privatization. Our key predictions are: a) there is compensation made by the non-tradable share holders to the tradable share holders if and only if the bargaining power of the former is weaker than the bargaining power of the latter; and b) the size of the compensation is decreasing in firm performance. Our second prediction contradicts conventional wisdom that fails to account for improved risk sharing after the reform. Our empirical results are broadly consistent with our model’s predictions. We conclude that better risk sharing is an important consideration in China’s share issue privatization.