THE BEHAVIOR OF STATE FIRMS IN EASTERN-EUROPE, PRE-PRIVATISATION

In this paper we explore the behaviour of state firms pre-privatisation, the incentives and the constraints facing managers and the nature and the power of the coalitions within the firms. We show that managers on low incentive payment schemes with little formal stake in privatisation and who face possible redundancy have little incentive to embark on restructuring. Hardened budget constraints, career concerns and potential stakes in the privatised firm, however, may strengthen managerial incentives to restructure. We then introduce an 'influence' function which captures how the distribution of winners and losers within the firm and size of their loss and gain affects the probability of restructuring. The function illustrates how strong opposition coming from large concentrated losses is likely to dominate diffuse support from small, widely distributed gains. Government measures such as hardening budget constraints, financing of severance payments, and selective debt write-downs affect the distribution of gainers and losers and may be used to overcome blocking coalitions and increase support for restructuring. Examination of a range of enterprise case studies vindicates our hypothesis that the structure of control and production strongly affect incentives to restructure. Centralised management structures, the presence of non-performing units and a functional division of activities have all acted as serious constraints on the unbundling/restructuring process whilst the removal of state subsidies has been critical in forcing firms to rationalise production and unbundle activities.