The importance of career concerns in managerial incentives has received renewed interest in the context of transition economies. This renewed interest is related to surprising empirical findings on managerial behaviour in state-owned enterprises (SOEs). In Discussion Paper No. 1363, Research Fellow Gérard Roland and Khalid Sekkat provide an analysis of career concerns as a motivation for restructuring in SOEs. The analysis is based on a dynamic adverse selection model with heterogeneity of managerial quality.

The authors show 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.

Managerial Career Concerns, Privatization and Restructuring in Transition Economies
Gérard Roland and Khalid Sekkat