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Abstract

Market liberalization in Central and Eastern Europe was targeted at establishing incentives that would improve economic performance. While substantial reorganization of enterprises is observed, firms can also be observed which devote resources towards establishing organizational legitimacy. Motivations for such behavior are considered and empirical evidence of its relationship with technical efficiency using a distance function approach is analyzed for the case of Czech agriculture. Contrary to the expectation that such behavior would be inefficient, we find that firms reap private economic gains from legitimacy efforts through improved access to agricultural land, investment subsidies and firm internal social capital. However, its effect on technical efficiency depends on whether such legitimacy efforts are valued by stakeholders or understood as a norm. Evidence of the trade-off between gains or sustainability from legitimacy and reorganization thus brings a new perspective to the understanding of structural changes in transition.

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