Public enterprises around the world have proved to be highly inefficient, primarily because they pursue strategies, such as excess employment, that satisfy the political objectives of politicians who control them. Privatisation of public enterprises can raise the cost to politicians of influencing them, since subsidies to private firms necessary to force them to remain inefficient are politically harder to sustain than wasted profits of the state firms. In this way, privatisation leads to efficient restructuring of firms. Moreover, privatisation is more effective when combined with a tight monetary policy, and when the new owners of firms are profit maximising investors, rather than their employees or even managers.

We use a survey of 452 Russian shops, most of which were privatized between 1992 and 1993, to measure the importance of alternative channels through which privatization promotes restructuring. Restructuring is measured as major renovation, a change in suppliers, an increase in hours stores stay open, and layoffs. There is strong evidence that the presence of new owners and new managers raises the likelihood of restructuring. In contrast, there is no evidence that equity incentives of old managers promote restructuring. The evidence points to the critical role new human capital plays in economic transformation.

Economic policy advice is often dispensed based on a model of a unified, benevolent government. For some transition economies, this model is inappropriate and can lead to bad advice. The more appropriate model — that of a badly divided government — often leads to very different policy recommendations. We illustrate this point using the example of pre-privatization restructuring of state firms, and discuss its implications for foreign economic assistance.

ing from the current economic situation: MI 1. Which of the following achievements would please you more? A. You win fortune without fame: you make enough money through successful business dealings so that you can live comfortably for the rest of your life. B. You win fame without fortune: for example, you win a medal at the Olympics or you become a respected journalist or scholar. Responses in percent Fortune Fame without without Sluvey fame fortune size Ukraine (pre-coup) 67 33 90 Russia (Moscow) 65 35 92 Russia (Omsk) 81 19 107 U.S.A. (New York) 54 46 117 Japan (Tokyo) 68 32 126 Rober t J. Shiller, Maxim Boycko, and Vladimir Korobov 147 Little difference across countries appears in the responses: the exception is Omsk, where money appears to be most important. Virtually no difference in answers appears to exist between Japan and Ukraine or Ja-

Random samples of the Moscow and New York populations were compared in their attitudes towards free markets by administering identical telephone interviews in the two countries in May 1990. Although the Soviet respondents were somewhat less likely to accept exchange of money as a solution to personal problems and although their attitudes toward business were less warm, the authors found that the Soviet and American respondents were basically similar in some very important dimensions: in their attitudes toward fairness, income inequality, and incentives and in their understanding of the working of markets. Copyright 1991 by American Economic Association.