This paper suggests that management's role in enterprise restructuring and market failures in the managerial labor market help explain important features of the German privatization program. A model of adverse selection based on information advantages for private owners demonstrates how privatization can improve the quality and number of western managers in eastern enterprises. These benefits can increase with the size of the transition. Evidence of management replacement and significant differences between state-owned and privatized firms from a survey of eastern German firms supports model assumptions and predictions. These results suggest the importance of management replacement to successful privatization.

This paper suggests that management's role in enterprise restructuring and market failures in the managerial labor market help explain important features of the German privatization program. A model of adverse selection based on information advantages for private owners demonstrates how privatization can improve the quality and number of western managers in eastern enterprises. These benefits can increase with the size of the transition. Evidence of management replacement and significant differences between state-owned and privatized firms from a survey of eastern German firms supports model assumptions and predictions. These results suggest the importance of management replacement to successful privatization. Copyright 1997 by American Economic Association.

This paper examines the role that organization structure and contract design played in resolving economic and political problems that arose during Germany's privatization process. We find that German officials structured organizations and contracts in a way that made credible the government's commitment to rapid privatization. This credibility served to protect the process from political and social opposition. In addition, it enabled Germany to attract talented private sector managers to its privatization effort. This began with the establishment of an independent privatization agency, the Treuhand. It culminated with the creation of another set of independent organizations called Management KGs, to which the Treuhand outsourced part of its restructuring, management and privatization work.