Russia and other countries in thecommonwealth of independent states that have implementedvoucher privatization programs have to account for thepuzzling behavior of insiders manager-owners-who, instripping assets from the firms they own, appear to bestealing from one pocket to fill the other. This articlesuggests that asset stripping and the absence ofrestructuring result from interactions between insiders andsubnational governments in a particular property rightsregime, in which the ability to realize value is limited byuncertainty and illiquidity. As the central institutionsthat govern the Russian economy have ceded their powers tothe provinces, regional and local governments have imposed avariety of distortions on enterprises to protect localemployment. To disentangle these vicious circles of control,this article considers three sets of institutional changes:adjustments to the system of fiscal federalism by whichsubnational governments would be allowed to retain taxrevenues generated locally; legal improvements in theprotection of property rights; and the provision ofmechanisms for restructuring and ownership transformation ininsider-dominated firms. The aim of these reforms would beto change the incentives that local governments, owners, andinvestors face; to convince subnational governments that amore sustainable way of protecting employment lies inprotecting local investment; to raise the cost of theft andcorruption by insiders and local officials; and to allowinvestors to acquire controlling stakes in viable firms.
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