DP1363 Managerial Career Concerns, Privatization and Restructuring in Transition Economies

Author(s): Gérard Roland, Khalid Sekkat
Publication Date: March 1996
Keyword(s): Managerial Career Concerns, Privatization and Restructuring, Transition Economies
JEL(s): D29, H39, P29
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1363

We set up a dynamic adverse selection model to explain how career concerns may induce managers in state-owned enterprises (SOEs) to restructure their firms. It is shown how government monopsony power over managers led to the ratchet effect under the socialist economy, even under reforms coming short of privatization. The introduction of a managerial labour market, through privatization, introduces competition for managers and eliminates the ratchet effect, thereby inducing managers to restructure. Prospects of privatization also provide incentives to restructure even when managerial skills are asset-specific, provided insider control is strong enough to give managers enough rents from privatization. The model is consistent with the empirical evidence on restructuring of SOEs in transition economies.