Three essays on the transition in Eastern and Central Europe

This dissertation examines the evolution of firm behavior at various stages in the transition in Eastern and Central Europe. The first essay examines the commonly-employed characterization of the Polish state-owned enterprise as a labor-managed firm. It argues that this representation does not satisfactorily explain survey evidence of these enterprises restructuring in the absence of appreciable privatization. In order to explain this behavior, we develop a stylized signalling model where state-owned enterprise managers convey their ability to a competitive private sector job market by their choices of projects, i.e. restructuring efforts, that they undertake. As the job market cannot ex ante determine highly able managers from less able ones, both types of managers find that their optimal action is to select the same signal. We explain the across-the-board survey results of managers undertaking similar restructuring efforts, as a pooling equilibrium. In the second essay, we consider the quality choices of Polish state-owned enterprises. Modeling firm behavior as duopoly price competition in a vertically differentiated market, we examine the impact of a tariff on the domestic firm\u27s choice of output quality. While welfare, defined as the domestic firm\u27s profits, is enhanced by protection, its impact on quality depends upon the characterization of the firm. When the firm is a profit maximizer, the tariff causes it to select higher output quality. If the domestic firm is labor-managed, it will produce lower output quality. In the third essay, we develop an analytical framework which shows that effective enterprise restructuring occurs in the long-run. After the adoption of western-style corporate features and the privatization of enterprises, there remain informational asymmetries between owners and their agents which will only be resolved over time. This essay also looks at insider domination, and extends our basic analytical framework to examine it. This paper looks at the Russian and Czech privatizations and considers their common features. Finally insider domination is explored in these two cases