these studies use data on developed countries only. This may be of little relevance for developing and transition economies which do not have a well-established regulatory framework, and highlyqualified public sector managers as those in the United Kingdom. Thus, the frequent rejection of the hypothesis that privatization leads to performance improvements (only 28 of the 87 studies report such findings) may not be surprising.

The more recent empirical literature on privatization focuses on developing countries (LaPorta and Lopez-de-Silanes, 1997) or on a cross-section of industrialized and semiindustrialized countries (Boubakri et al., 1997) of firms in (mostly) competitive sectors. These studies use larger datasets which allow for a direct test of the relative efficiency of state-owned versus private enterprises, but do not take into account the effect of different institutional environments. No study to-date has, for example, estimated the separate effects of privatization and stabilization (hardening of budget constraints). An exception is Picot and Kaulmann, 1992 which controls for country and sector effects in a cross-section of six developed countries. Nevertheless, privatization is found to have a positive effect on profitability, labor productivity, and new investment flows in all three studies.

Much of the empirical literature on the benefits of privatization preceded the theory of privatization and hence lacked a methodological framework to analyze its findings. It did, however, serve -- coupled with a healthy doze of faith -- as the basis for the large scale privatization programs in the transition economies. Now, equipped with both the SV model on the benefits of privatization and data from seven transition economies, it is an opportune time to test some of the hypotheses on the relationships between privatization and firm performance.

# **11. The new theory of politicians and firms**

With the collapse of central-planning in Central and Eastern Europe and the (then) Soviet Union interest in the theory of privatization emerged. The pathbreaking study in this literature (Boycko et al., 1993) was motivated by (and influenced) the Russian mass-privatization program. The model, and its subsequent refinements (Shleifer and Vishny, 1994 and 1996), focuses on the separate impact of privatization, deregulation, and stabilization, as well as corruption on enterprise performance. It identified a number of specific empirically testable hypotheses. The model cast doubt on the robustness of previous empirical findings which did not account for deregulation, stabilization, and corruption, and narrowly focused on privatization.

The SV model centers around the political economy aspects of privatization. In particular, the focus is on the interests of politicians to have state enterprises employ excess people at above market wages (or to charge prices below marginal factor costs to favored consumer groups or be inefficient more generally) so as to obtain more political support. The SV model separates the effects of control rights and cash flow rights. Four types of firms are distinguished: state enterprises, i.e., with control rights and cash flow rights in the hands of the state; commercialized state enterprises, i.e., with control rights with managers but cash flow rights with the state; regulated private firms, i.e., with control rights but no cash flow rights with private owners; and private firms, i.e., with control rights and cash flow rights with private owners. The SV model _5_