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Privatization and Management Incentives in the Transition Period in Eastern Europe

  • Schmidt, Klaus M.
  • Schnitzer, Monika

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.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 3109.

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Date of creation: Jun 1993
Date of revision:
Publication status: Published in Journal of Comparative Economics 2 17(1993-06): pp. 264-287
Handle: RePEc:lmu:muenar:3109
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  1. Sinn, Hans-Werner, 1992. "Privatization in East Germany," Public Finance = Finances publiques, , vol. 47(Supplemen), pages 152-71.
  2. Stanley Fischer, 1991. "Privatization in East European Transformation," NBER Working Papers 3703, National Bureau of Economic Research, Inc.
  3. Eduardo Borensztein & Manmohan S. Kumar, 1991. "Proposals for Privatization in Eastern Europe," IMF Staff Papers, Palgrave Macmillan, vol. 38(2), pages 300-326, June.
  4. David E. M. Sappington & Joseph E. Stiglitz, 1987. "Privatization, information and incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(4), pages 567-585.
  5. Schnitzer, Monika, 1995. "\"Breach of Trust\" in Takeovers and the Optimal Corporate Charter," Munich Reprints in Economics 19896, University of Munich, Department of Economics.
  6. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  7. Andrei Shleifer & Lawrence H. Summers, 1987. "Breach of Trust in Hostile Takeovers," NBER Working Papers 2342, National Bureau of Economic Research, Inc.
  8. Schaffer, Mark E., 1989. "The credible-commitment problem in the center-enterprise relationship," Journal of Comparative Economics, Elsevier, vol. 13(3), pages 359-382, September.
  9. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  10. Jean Tirole, 1991. "Privatization in Eastern Europe: Incentives and the Economics of Transition," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 221-268 National Bureau of Economic Research, Inc.
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