SFB 303 Discussion Paper No. A - 374
Author: Schmidt, Klaus M., and Monika Schnitzer
Title: Privatization and Management Incentives in the Transition Period in
Eastern Europe
Abstract: Privatization and Restructuring of large industrial companies is one
of the most important and most difficult elements in the current transformation
process of the economies in Eastern Europe. This 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 can be analyzed. The model allows for a
comparison of many of the privatization proposals that have been put forward
in recent years. The model predicts that immediate privatization of the
firms will lead to strong incentives for managers to restructure but also to
high social costs of bankruptcies and layoffs. If the government stays in
control during the transition period the social costs of adjustment will be
lower. However, in this case the manager faces a "soft budget constraint"
and has less incentives to restructure. The model also gives some insights
on which companies should be privatized first.
Keywords: Privatization, Principal-Agent Theory, Economic Reform in Eastern
Europe
JEL-Classification-Number:
Creation-Date: June 1992
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