Privatization and Management Incentives in the Transition Period in Eastern Europe

The paper develops a simple theoretical framework in which the
impact of different governance structures on management incentives,
the efficiency of restructuring, and the social costs of the
adjustment process in the transition period in Eastern Europe can
be analyzed. The model shows that immediate privatization leads not
only to strong management incentives to restructure but also to
high social costs of bankruptcies and layoffs. If the government
stays in control social costs will be lower. However, in this case
managers face a soft budget constraint and have less incentive to
restructure. The model also suggests which companies should be
privatized first. J. Comp. Econom., June 1993, 17(2), pp 964-287.
University of Bonn, D-531 13 Bonn, Germany.