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36 Program on Central and Eastern Europe

Restructuring in the Czech Republic- Beyond Ownership & Bankruptcy

1995 – Gerald A. McDermott and Aydin Hayri


Restructuring of large industrial holdings in the Czech Republic (S-farms) depends on probes into new markets. The development and financing of probes generates internal holdups and stalemates among the government, banks, and S firms. The government tries to preserve the value of just-privatized S-firms while avoiding subsidies; banks, facing their delinquency, cannot force bankruptcy since keeping them as clients is as important as maintaining capital ade quacy. A compromise arises, 1MBR (intricate monitoring based restructuring), where the outside parties condition their involvement on a peculiar reorganization of the farm. We provide the empirical and theoretical underpinnings of IMBR, the emergence of which is neither deliberate nor accidental. (Keywords; Restructuring, privatization, incom plete contracts, monitoring) ·We use aliases for the names of their companies and their managers to protect their privacy. An earlier version of this paper was presented at the Ford Foundation Conference on CR transition at CERGE-EI. Prague CR. May 1994. '!The research was conducted at CERGE-EI. Prague CR. where Hayri was a visiting professor and McDermott is a visiting re searcher. McDermott's dissertation research was supported by generous grants from the US-CR Fulbright Commission and the Center for European Studies. Harvard University. The authors would like to thank CERGE-EI for its gracious administra tive support and hospitality and the following people for insightful comments and help: Suzanne Berger. Ales Capek. Zhi­yuan Cui. Jeremy Edwards. John Griffin, Miroslav Hrncir. Mike Jetton. Tony Levitas, Richard Locke. Ivana MazaIkova, Gerard Roland. Charles Sabel, David Stark. Frantisek Turnovec, and participants in a seminar at the University of Warwick.