Politicians, Firms and the State of Institutional Environment

The model we develop analyses how the state of an institutional environment influences resources allocation in a transition economy. We capture the interaction between politicians who influence firms' decisions regarding resources allocation and managers, introducing a parameter which measures the strength of institutions. The results of our model confirm that building up strong institu-tions in a transition economy can play a central role in privatisation and restructuring processes and motivate agents to agree on a better resources allocation.