As discussed in Section V, we expect the endogeneity of privatization to be important. We attempt to correct for the bias introduced in selecting firms for privatization, using preprivatization (1991) efficiency and other firm characteristics. Different hypotheses exist on the _sign_ of the association between pre-privatization efficiency and the likelihood of privatization depending on the _mode_ of privatization. If the privatization method is sales to outsiders, we would expect to see a positive association since outside investors (in the absence of any additional knowledge about the firm) would interpret past performance as a good indicator for future performance and would invest in firms with high initial efficiency. If privatization is mainly to insiders, we may expect to find a perverse relationship. This is because managers would have the incentive to show poor initial performance so that they could buy the firm at a cheaper price. The same could be the case in situations where an outside investor (including foreign investors) would strike a deal with current management to lower the price in exchange for keeping their jobs. Thus it is not clear _a priori_ what association we may find on average across the seven countries.

The results from the first step regressions are reported in Table 7. We estimate probit regressions for each individual country and not for the sample as a whole. Since the country regressions are more likely to capture the differences in selection bias across privatization techniques, we use the MILLS variables generated in these regressions, rather than a full sample regression that may obscure the selection bias. The coefficients on the VCS:91 variable are positive (and significant) for Poland, and Slovenia; negative (and significant) for the Czech and Slovak Republics, and insignificant for Bulgaria (negative), Hungary (positive), and Romania (negative). The coefficient in the full-sample regression is positive and insignificant. This outcome is somewhat surprising - it could be interpreted to indicate that less efficient firms were more likely to be privatized during 1992-95. We favor the explanation given earlier - if privatization deals went to insiders, they had the incentive to let pre-privatization performance slip, so as to get a better price. Indeed, such hypothesis is supported by the signs across countries, since Poland and Slovenia had the most insider privatization in the sample and both show significant positive signs.

We next re-mn equation (3) with the additional variable MILLS (Table 8) for the secondstep regression. The MILLS coefficients is negative and statistically significant. This suggests that some endogeneity in privatization outcomes indeed exists. The other results are qualitatively similar to the ones reported in Table 6. The endogeneity correction influences the estimated effects of privatization but not in ways inconsistent with the theory. The privatization coefficients remain positive and significant although their magnitude decreases. Thus in 1994, the coefficient drops from 6.2% to 4.3%. The coefficients on SUBS also remain the same in sign and relative magnitude. The BANKFIN9 4 coefficient (marginally) loses its significance. Some of the country coefficients change signs. Thus the Czech and Slovak coefficients in the last period turn negative, while the Bulgaria coefficient turns positive (but insignificant). But in general the two-step estimation provides further support for the SV model.

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