Incentive contracts,corporate governance,and privatization funds in Romania

This paper analyzes the governance problems of the Romanian Private Ownership Funds (POFs), critical institutions both in the privatization process and in the future ownership and control structure of the Romanian economy. Although the POFs share similar problems with mass privatization intermediaries elsewhere, the satisfactory performance of Romanian funds faces additional obstacles due to the bureaucratic character of their initial organization, the continuing involvement of the state in their governance and operation, and the complexity of the tasks that they are supposed to accomplish. The POFs are charged not only with governing companies and managing their portfolios, but with part of the task of selling the remaining state shareholdings. We review instruments of corporate governance that could potentially induce them to perform these tasks, and conclude that the standard practices are likely to be seriously deficient in the case of the Romanian POFs. One possibility which has not yet been adopted is an incentive payment scheme for POF executives. We analyze the difficulties of implementing such a scheme with a multi-task principal-agent model, and propose a practical solution to the incentive design problem. We argue that, while some such method is certainly necessary to induce the POFs to perform their assigned tasks even approximately, it is by no means sufficient to enliven the Romanian privatization process. The author is grateful for a research grant from the National Council for Soviet and East European Research, received through the Center for Economic Policy Research at Stanford University. Encouragement from Ralph W. Pfouts, discussion with Alexander Dyck, and comments from Roman Frydman on an earlier draft are gratefully acknowledged.