PRIVATIZATION AND NEW ENTRY IN POST-COMMUNIST TRANSITION: THE IMPACT ON RESTRUCTURING

Abstract

This work suggests a connection between the lack of restructuring of the privatized firms in transition and the high level of regulatory barriers faced by the private sector. In this work I suggest that the potential entry of the newly created private firms significantly affects the incentives of the privatized firms regarding restructuring. Since the entry of new businesses is threatening to the inefficient existing enterprises, managers of these enterprises have an incentive to use their political power to restrict the new entry. Given that the restructuring often involves politically unpopular measures, such as shedding of excess labor, politicians may prefer to see no restructuring of the privatized firms, thus creating a possibility for the privatized enterprises to lobby with politicians for the creation of entry barriers.

The first chapter presents the background on privatization and restructuring in transition and reviews the existing literature on the subject. It also outlines the argument for the connection between new entry and the behavior of the existing enterprises.

The second chapter presents an analytical model that investigates the conditions under which managers of the existing enterprises are likely to be successful in lobbying with politicians for the restriction of new entry. This chapter also discusses some examples of policies that would make such lobbying less likely, thus bringing an economy closer to the efficient equilibrium with more restructuring and low entry barriers.

The third chapter uses data from the World Business Environment Survey to explore whether the threat of new entry induces managers of the existing firms to lobby with politicians, resulting in high entry barriers and low restructuring by the existing firms. Specifically, I investigate how the competition created by the new entrants affects the probability that high regulatory barriers are erected. The results indicate that the presence of excess employment (i.e. lack of restructuring) at the existing firms coincides with the new entrants facing high regulatory barriers. Furthermore, higher competition from the new entrants may result in new firms facing higher entry barriers, lending support to the argument that the level of regulatory barriers is influenced by the existing firms via lobbying.