Managerial career concerns, privatization and restructuring in transition economies

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 a 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. The model is consistent with the empirical evidence of SOEs restructuring in transition economies. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D29; H39; P29.