sector. This bias was due to the distorted expectations of enterprise managers. They initially expected the program to be a "hospital" set up by the government to re-vitalize enterprises. Managers of the better firms, on the other hand, withheld from participation since they expected bigger gains if they could negotiate with strategic investors.

The endogeneity problem is likely to be more severe in samples where firms were mostly privatized through sales to strategic investors (domestic or foreign). Sales to foreign investors were possibly focused on firms with substantial market power. Previous case study evidence supports this hypothesis (Carlin et al., 1995). Sales to domestic strategic investors may have been driven by superior knowledge of the enterprise growth opportunities. This is especially the case for privatization to insiders (management buy-outs, management-employee buy-outs) as discussed in the Polish case. We address this specific issue in Section VII.

To correct for the possible endogeneity of privatization choices, we perform the empirical analysis in two steps. The hypothesis here is that a firm is most likely to be privatized if it was relatively efficient in the pre-privatization period. The approach we use is the generalized Heckman two-step procedure for correcting sample selection bias as developed in Amemiya (1974). The method involves separate estimation of the privatization decision and the subsequent firm productivity growth decision. The first step is a probit model to determine the probability of privatization based on pre-privatization efficiency (proxied by the share of variable costs in total revenues), firm size, and sector origin.<sup>4</sup>

# VI. **Sample** Statistics

We report five sample statistics that relate to efficiency and enterprise financing. First, we report the average (and median) employment (SIZE) in four groups of enterprises for the first and last year in our sample (Table 4, first panel). The SV model predicts a reduction in excess labor as a result of privatization. We use t-statistics to show the statistical significance of this differential labor shedding. Indeed, enterprises that have been privatized early in the period have shed the most labor. Labor productivity (LABPRO) is a useful measure of restructuring, particularly in the early stages of enterprise adjustment. Again, enterprises that have been

> 4The second step in the Heckman procedure involves an OLS estimation, using only privatized fmns, and results in sample selection bias, defined as the omitted variable problem. The procedure provides for a specification of the omitted variable that can be used in the truncated sample to alleviate sample selection. The omitted variable is the ratio of the value of the standard normal density function to the value of the standard normal cumulative distribution function (the inverse Mills ratio) and is computed directly as part of the TSP econometric package we use. Amemiya (1974) generalized the Heckman approach to include all observations in the second step by developing a measure of the inverse Mills ratio for zero observations, i.e., for state-owned firms. We use Amemiya's approach to calculate the inverse Mills ratio and employ it as an instrument for the unobserved (by the econometrician) impacts on privatization decisions. The estimating equation (3) is augmented by the additional independent variable MILLS - the inverse Mills ratio calculated from the results of the probit estimation of privatization outcomes on pre-privatization VCS, firm size, and sector origin.

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