Restructuring as a Signal : A Simple Formalization

Several studies stressed that contrary to the initial expectations, state-owned firms at the beginning of the transition, undertook painful measures to adjust to the new economic environment. This paper investigates this behavior in a simple game theoretic framework. It is argued that the massive amount of lay-offs created by state-owned firms during the initial phase of the transition can be interpreted as a signal directed to the banking sector in order to obtain more favorable financing conditions for the subsequent process of restructuring. The conclusions are strongly supported by Polish firm level empirical evidence