We use a survey of 452 Russian shops, most of which were privatized between 1992 and 1993, to measure the importance of alternative channels through which privatization promotes restructuring. Restructuring is measured as major renovation, a change in suppliers, an increase in hours stores stay open, and layoffs. There is strong evidence that the presence of new owners and new managers raises the likelihood of restructuring. In contrast, there is no evidence that equity incentives of old managers promote restructuring. The evidence points to the critical role new human capital plays in economic transformation.

Several Eastern European countries have initiated mass privatization programs to transfer state-owned assets to the general population. We show that the decision to pursue mass privatization and even the specific design of the programs are largely dictated by politics. Nonetheless, politically feasible programs can also be made attractive from an economic standpoint in terms of maximizing value, fostering free and efficient markets, and promoting corporate governance. In general, the design of economic institutions is critically shaped by political factors, although satisfactory economic results can be achieved in spite of political constraints.