Working Paper: CEPR ID: DP1363
Authors: Gerard Roland; Khalid Sekkat
Abstract: 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.
Keywords: transition economies; privatization; restructuring; managerial career concerns
JEL Codes: O29; H39; P29
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government's monopsony power (J42) | Ratchet effect (E32) |
| Ratchet effect (E32) | Reduced managerial effort (M54) |
| Reduced managerial effort (M54) | No restructuring (L19) |
| Privatization (L33) | Elimination of ratchet effect (C22) |
| Elimination of ratchet effect (C22) | Motivation to restructure (L21) |
| Managerial skills are asset-specific (M54) | Privatization can incentivize restructuring (L33) |
| Insider control (G34) | Incentives for restructuring (G32) |
| Absence of insider control (G34) | Lack of incentives for restructuring (G32) |