Kai A Konrad
email: kkonrad@wz-berlin.de.z

Amedeo Spadaro
email: amedeo.spadaro@uib.es

Education, redistributive taxation and confidence

Keywords: Education, redistribution, confidence Education, redistribution, con…dence. JEL classi…cation numbers: D78, H23, I21

We consider redistributional taxation between people with and without human capital if education is endogenous and if individuals di¤er in their perceptions about own ability. Those who see their ability as low like redistributive taxation because of the transfers it generates. Those who see their ability as high may also like redistributive taxation because it stops other people receiving education and increases the quasi rents on their own human capital. It is surprising that this rather indirect e¤ect can overcompensate them for the income loss from taxation and make the overcon…dent want higher taxes than the less con…dent do. The results, however, turn out to be in line with empirical evidence on the desired amount of redistribution among young individuals.

Introduction

A common theme in life and in literature suggests that people are leftist, socialist, even communist, or at least have strong egalitarian redistributional preferences when they are young, and as they grow older they tend to become conservative, particularly if their professional career had been successful. This shift in redistributional preferences is often attributed to the change in income position and its variability. As has been pointed out by [START_REF] Sinn | A theory of the welfare state[END_REF], young people face a situation in which future income is uncertain and which they cannot fully control. These people may want future redistributional taxation as a means of insurance, but, once their own position in the income distribution has been determined, the demand for redistribution that stems from the insurance motive disappears. [START_REF] Piketty | Social mobility and redistributive politics[END_REF] emphasizes the importance of mobility experience for redistributional preferences: mobility experience may be related to perceptions about the incentive cost of redistribution and may account for di¤erences in redistribution in di¤erent countries. Income dynamics and social mobility also play a major role in a number of analyses that consider redistributional preferences and voting outcomes on redistributive taxation. Individuals who expect a major change in their income will take this into consideration when expressing their attitudes about governmental income redistribution. 1 Ravallion and Lokshin (2000), who consider the Russian situation, …nd that own expectations about own future welfare are very relevant for redistributional preferences. Empirically, high current income makes individuals favor less redistribution (see, e.g., [START_REF] Fong | Social preferences, self interest, and the demand for redistribution[END_REF][START_REF] Piketty | Social mobility and redistributive politics[END_REF], 1999[START_REF] Gilens | Why Americans Hate Welfare: Race, Media and the Politics of Antipoverty Policy[END_REF], p.51, or Kluegel and Smith 1986). This is a result that is robust with respect to the addition of socio-demographic characteristics. However, other variables also matter, and these can considerably reduce the share that income contributes to redistributional preferences [START_REF] Piketty | Attitudes toward inequality in France: Do people really disagree?[END_REF]). One aspect is whether individuals think that success is determined by luck or is the reward for personal e¤ort. This, and some further aspects that motivate attitudes towards redistribution, are surveyed and analysed empirically in [START_REF] Fong | Social preferences, self interest, and the demand for redistribution[END_REF]. 1 Two papers analysing some of these aspects are [START_REF] Glazer | Intertemporal commitment problems and voting on redistributive taxation[END_REF] and [START_REF] Bénabou | Social mobility and the demand for redistribution: the Poum Hypothesis[END_REF]. [START_REF] Glazer | Intertemporal commitment problems and voting on redistributive taxation[END_REF] show that rich people may want to live in a neighborhood where a persistent majority of poor makes sure there will also be some redistribution of income in the future if there is some risk that they themselves will become poor then. [START_REF] Bénabou | Social mobility and the demand for redistribution: the Poum Hypothesis[END_REF] show that the "prospect of upward mobility" may yield a political majority that opposes redistribution.

Perceived bene…ts from poverty reduction could, for instance, be based on altruism or group loyalty [START_REF] Luttmer | Group loyalty and the taste for redistribution[END_REF] or on the crime reducing e¤ect of poverty reduction (Pauly 1973, Piven and[START_REF] Piven | Regulating the Poor: The Functions of Public Welfare Random House[END_REF]. 2In this paper we highlight an additional, intra-generational dimension along which redistributional preferences can di¤er. This dimension can moderate or even reverse the relationship between own income expectations and preferences for future redistributional taxation, even though it is based purely on narrowly de…ned sel…sh behavior. Future redistributional taxation a¤ects the choice of whether to invest in human capital. In turn, redistributional taxation a¤ects the scarcity rents of human capital. We characterize conditions where individuals, who perceive their own talent as high and are therefore likely to bene…t greatly from human capital investment, may prefer even more redistribution than those who are less con…dent about their talent. 3We consider a large set of individuals who are all symmetric ex ante, except for their beliefs about what they can gain from investing in education. Some individuals expect to be able to gain little. Some individuals have intermediate expectations about what they can gain, and, …nally, some individuals expect to earn a high education premium. In line with the large and growing literature in economics that draws on empirical observations from psychology about perception biases regarding own ability, we could also assume that these di¤erences are simply based on di¤erent 'psychological biases'. Accordingly, the three groups may be called 'undercon…dent', 'adequately con…dent' and 'overcon…dent', respectively. For our results it does not matter if these di¤erences in expected education premiums are 'true'in the sense that they are based on heterogenous, but true perceptions about own ability, or are caused by perception biases.

For a given cost of investment in education, the investment incentives of the three types of individual will be di¤erent, and they may also di¤er in their preferences for income redistribution. Those who expect higher own returns from education investment will be more likely to invest in education and this is unsurprising. However, the redistributional preferences can be surprising. We show that the individuals who are highly con…dent may prefer more redistribution than the individuals who are less con…dent or even have no con…dence at all. 4 The intuitive reason is as follows. The less con…dent individuals are unlikely to invest in education and will not pay the tax on the education premium. They would like to maximize the per capita net transfers to the individuals who do not invest in education, and, in this respect, they face a La¤er type trade-o¤: a higher tax reduces the tax base. The highly con…dent individuals collectively may want to exclude others from acquiring education, because the smaller the set of highly educated persons, the higher their skill premium. Hence, the highly con…dent also face a trade-o¤: the higher the tax they have to pay, the larger the skill premium they can obtain. Which of the most preferred taxes of the two groups is the higher is unclear, as they optimize along di¤erent trade-o¤s. 5 For our analysis it does not matter whether education investment endows individuals with skills that improve their productivity in the labor market as is predominantly assumed in the human capital theory [START_REF] Becker | Investment in human capital: a theoretical analysis[END_REF], or whether the productivity increase is the result of education as a …lter and assignment process, as has been discussed by [START_REF] Arrow | Higher education as a …lter[END_REF].

In the theoretical analysis we assume that all individuals di¤er only in their perceptions about their own ability. We need not discriminate between whether these perceptions are based on true di¤erences or simply misperceptions. Indeed, con…dence biases, and overcon…dence in particular, are documented in the psychology literature. 6 For the purpose of our analysis, 4 A possible candidate for explaining such preferences in a theoretical analysis is risk aversion. As is known from [START_REF] Dionne | Self-insurance and self-protection and increased risk aversion[END_REF], self-insurance and selfprotection have non-trivial and partially paradoxical comparative statics. But this explanation is not at work in our framework as we consider risk neutral agents.

5 Alternative tools may come to mind when we think about how to increase scarcity rents for human capital. Note, however, that the group of individuals under consideration cannot simply erect more classical barriers to entry such as admission rules that are guarded by professional associations. Such classical barriers make sense only for individuals who are already "inside" and have passed the barriers that are to be erected, whereas, prior to the education choice, the individuals who express their redistributional preferences are still themselves "outside". 6 The most relevant evidence in this context is the "better than average"e¤ect that has we adopt the notion of being 'highly con…dent', 'just con…dent' and 'lowly con…dent'. This irrelevance regarding the causes of di¤erences in con…dence is also important when turning to the data. Individuals' perceptions matter for their career decisions, regardless of where these perceptions come from and whether they are correct or not. Accordingly, those who expect to earn higher education premiums will self-select into education programmes, whether they are overly optimistic about their abilities or are simply really better than average. Hence, the education choice can be seen as a proxy for con…dence as regards own bene…ts from the education investment, i.e., for high con…dence, and when we analyse survey data on redistributional preferences, the education choice is our proxy for con…dence.

Taxation and education choices

Let there be a continuum of individuals i, with i 2 [0; 1]. Each individual can abstain from trying to become productive and receive a wage that is normalized to zero. Alternatively, the person can invest in education. The cost of investment is e. This can be thought of as the opportunity cost of time or inconvenience, but it is expressed in terms of its equivalent monetary income such that e and monetary income can simply be added.

Educated individuals will earn a wage premium w, which is de…ned as

w = (a b) . (1)
Consider the components of w in (1). First, is a random variable that re ‡ects the individuals'con…dence in their education productivity. Individuals know that their own productivity is a random variable, and we denote individual i's perceived expected productivity as E i . Individuals di¤er in their perceptions, re ‡ecting objective di¤erences, or psychological biases.

For concreteness, we focus on a simple distribution of expectations in which the individuals are allocated among three groups: A 0 is the group of been documented, e.g., by [START_REF] Guthrie | Inside the judicial mind: heuristics and biases[END_REF] with respect to judges' assessments of their decisions, or by [START_REF] Svenson | Are we all less risky and more skillful than our fellow drivers?[END_REF] with respect to driving skills. Further references can be found, for instance, in [START_REF] Squintani | On-the-job signalling and self-con…dence[END_REF] and [START_REF] Heifetz | On the evolutionary emergence of optimism[END_REF]. Relevant papers considering the relationship between con…dence and dynamic education …lters are [START_REF] Squintani | On-the-job signalling and self-con…dence[END_REF] and Flåm and Risa (2003). This literature is silent with regard to redistributive taxation. individuals who have "high con…dence", individuals in A 1 have "intermediate or just con…dence", and individuals in A 2 have "low con…dence". These are characterized by the following expected values:

E i = h > 1, for i 2 A 0 E i = 1, for i 2 A 1 E i = 0, for i 2 A 2 .
(2)

Without loss of generality we can consider the individuals numbered and sorted so that the set of highly con…dent A 0 = [0; 0 ], the set of just con…dent A 1 = ( 0 ; 0 + 1 ], and the set of individuals with low con…dence, A 2 = ( 0 + 1 ; 1]. This exhausts the set [0; 1] of all individuals and also determines the relative size 0 , 1 and 1 0 1 of these groups. Note that, where individuals'perceptions are not correct but are biased with respect to their own ability, individuals have correct beliefs about the distribution of perceptions of con…dence etc.

Second, a and b in (1) are positive and exogenous parameters, and 2 [0; 1] is the share of individuals who invest in education. The expected wage premium is a linear, declining function of the share of educated individuals, and shows that the marginal product of human capital should be declining in the amount of the human capital that is available in the economy. We assume that a ( 0 + 1 )b e > 0.

(3)

This implies that education investment is desirable in the absence of taxes at least for all individuals i with E i 1 and rules out some uninteresting corner solutions.

A tax t will be chosen that is paid by all individuals who have invested in education, and, hence, earn the education premium (1). Taxes are redistributed on a lump-sum basis, similar to the classical analysis of redistributive taxation in Meltzer and Richard (1981). Accordingly, the government budget constraint requires that the transfer payment to each individual is equal to t. In a more narrow interpretation, t could also be seen as tuition fees. However, we follow the more general interpretation of a less speci…c tax in what follows.

Individuals'perceived payo¤s depend on their own education choice, the education choices of others, the size of the tax, and their own level of con…dence. For simplicity, individuals will be risk neutral. The perceived payo¤ of an individual who invests in education is

i (t; e) = E i (a b) (1 )t e. (4)
The expected payo¤ for an individual who does not invest in education and hence, does not earn an education premium is equal to

i (t; 0) t. (5)
In what follows we characterize the investment choices for di¤erent levels of taxes, and concentrate on pure strategy equilibria only.

Proposition 1 The equilibrium share of individuals investing in education is uniquely determined for all t 0. The equilibrium share is

(t) = 8 > > > > < > > > > : 0 + 1 if t 2 [0; a ( 0 + 1 )b e] T 1 a e t b if t 2 (a ( 0 + 1 )b e; a 0 b e) T 2 0 if t 2 [a 0 b e; ha 0 hb e] T 3 ah e t bh if t 2 [ha 0 hb e; ha e) T 4 0 if t 2 [ha e; 1) T 5 (6)
Proof. For their investment decision, individuals i compare their payo¤ i (t; e) from investing with their payo¤ i (t; 0) from not investing, and these values depend on the share of other individuals who invest in education.

All i 2 A 2 never invest in education, regardless of what any other individual does, as i (t; e) = e (1 )t < t for any tax t 0 and any share 0. Consider i 2 A 0 [ A 1 . For any , i (t; 0) = t for both i 2 A 0 and i 2 A 1 , whereas i (t; e) > j (t; e) if i 2 A 0 and j 2 A 1 . Accordingly, all highly con…dent individuals invest if at least some just con…dent individuals invest, and none of the just con…dent individuals invests if at least some of the highly con…dent individuals abstain from investing.

Consider a tax t 2

T 1 = [0; a ( 0 + 1 )b e]. Individuals i 2 A 1 invest if i (t; e) > i (t; 0)
, which can be written equivalently as a b e t > 0. For all 0 + 1 this inequality is ful…lled for all t 2 T 1 . All individuals from A 1 and, a fortiori, all individuals from A 0 invest, and this yields = 0 + 1 as the unique equilibrium share (t) for i 2 T 1 .

Consider a tax t 2 T 2 = (a ( 0 + 1 )b e; a 0 b e). Note that

(t) = a e t b (7)
is an equilibrium share for t 2 T 2 . All i 2 A 0 strictly prefer to invest if they believe that the share of other individuals who invest is equal to (t) as in (7) as they prefer to invest if ha hb e t > 0, and inserting (7) into this condition yields (h 1)(e + t) > 0, which is ful…lled as h > 1. All i 2 A 1 are just indi¤erent whether to invest; this can be con…rmed by inserting (7) into the indi¤erence condition a b e t = 0. Hence, a measure equal to 0 of individuals from A 1 may invest, making the belief (7) just ful…lled. There are uncountably many combinations of investment choices of individuals from A 1 that yield (7). However, the share ( 7) is the unique equilibrium share for t 2 T 2 . Suppose there is a second equilibrium share ^ 6 = a e t b . Note that it must hold that ^ 2

[0; 0 + 1 ]. Note further that for t 2 T 2 , ha hb e t > 0 is ful…lled for all ^ 2 [0; 0 + 1 ]. Hence, all individuals i 2 A 0 invest. Therefore, ^ 2 [ 0 ; 0 + 1 ]. If ^ 2 ( 0 ; 0 + 1 )
, then this requires that all i 2 A 1 must be just indi¤erent about whether to invest. But the indi¤erence condition for them is a b e t = 0 and has one unique solution which is (7). It remains to show that ^ = 0 and ^ = 0 + 1 are not equilibrium shares. For ^ = 0 , all individuals i 2 A 0 [ A 1 strictly prefer to invest, leading to a share of individuals who invest equal to 0 + 1 6 = 0 , hence, a contradiction. For ^ = 0 + 1 only i 2 A 0 prefer to invest, all i 2 A 0 prefer not to invest. This yields a group of individuals who invest which constitutes a share = 0 6 = 0 + 1 , and, hence, a contradiction.

Consider now taxes in the interval T 3 = [a 0 b e; ha 0 hb e]. Individuals i 2 A 1 invest (and i 2 A 0 invest a fortiori then) if a b e t > 0. For t > a 0 b e this inequality cannot be ful…lled for any > 0 . Hence, for taxes t > a 0 b e; it cannot be optimal for i 2 A 1 to invest in education. Consider then i 2 A 0 . They prefer to invest if ha hb e t > 0. Note that this inequality is strictly ful…lled for all t 2 T 3 nfha 0 hb eg for all 0 , implying that = 0 is the only belief that is consistent with equilibrium behavior. Finally, for t = ha 0 hb e , the condition ha hb e t > 0 is ful…lled for all < 0 , implying that = 0 is the only equilibrium belief for this tax as well.

Consider now taxes in the interval T 4 = [ha 0 hb e; ha e). Such high taxes are not compatible with > 0 , implying that only individuals with high con…dence may invest. Individuals i 2 A 0 invest if ha hb e t 0. However, ha 0 hb e t < 0, implying that less than all highly con…dent individuals invest in the equilibrium. Note that

(t) = ah e t bh (8)
Figure 1: The equilibrium relationship between t and the share (t) of individuals who invest in education.

is the unique solution to the indi¤erence condition ha hb e t = 0. For this, and only for this , all individuals from A 0 are indi¤erent to whether to invest.

Finally, consider the interval T 5 = [ha e; 1). In this interval, ha hb e t < 0 even for the smallest feasible 0. All individuals prefer not to invest and = 0 is the only equilibrium belief.

The equilibrium relationship between t and the share (t) of individuals who invest in education.The equilibrium relationship between t and the share (t) of individuals who invest in education.

The function (t) is displayed in Figure 1, and its curvature is intuitively plausible. A very low tax will not prevent individuals who expect to gain a premium from investing in education that strictly exceeds their education cost, and the higher the tax on the education premium, the smaller the group of individuals who decide to invest. For a su¢ ciently high tax all individuals prefer not to invest. The steps in the function (t) result from the jumps in con…dence levels E i between the three types of individuals considered.

Tax preferences

For the discussion of tax preferences it is useful to de…ne some of the limits of the tax intervals in proposition 1 explicitly. The highest tax rate at which all individuals except individuals with very little con…dence invest is

t a ( 0 + 1 )b e. (9)
For higher tax rates, some just con…dent individuals do not invest. In this range, the relationship between t and in the equilibrium is described by ( 7).

Once the tax rate is su¢ ciently high, all just con…dent individuals decide not to invest and only the highly con…dent individuals invest. The smallest tax rate for which this is true is

t a 0 b e. ( 10
)
The largest tax rate for which this is true is

t ha h 0 b e. (11)
For higher tax rates in the range T 4 , only some of the highly con…dent individuals invest and the relationship between t and is described by ( 8). From a certain tax rate onwards, however, no single individual will invest. This critical tax rate is t ha e.

For the analysis that follows we make the following assumption that is an implicit assumption about the elasticity of the tax base: b < min a e 2( 0 + 1 )

; ha e 2h 0 .

Condition (12) implies that (t)t is non-increasing in t both for t 2 T 2 and t 2 T 4 . This makes it easier to single out the most preferred tax rates from the perspective of individuals from the sets A 0 , A 1 and A 2 . It will turn out that we can concentrate on comparing preferences about the tax rates t , t and t .

Proposition 2 The tax rate that is most preferred by individuals from group A 2 is t or t . They strictly prefer t to t if

(a ( 0 + 1 )b e)( 0 + 1 ) > (ha h 0 b e) 0 ( 13
)
and t to t if the reverse inequality holds.

Proof. Individuals i 2 A 2 choose t that maximizes (t)t. This maximum is in the range [t ; t ] as (t)t is strictly monotonically increasing in t for t < t and (t)t = 0 for all t t . The elasticity condition (12) further simpli…es the problem, as b < a e 2( 0 + 1 ) implies that d( (t)t) dt < 0 in the range t 2 T 2 , and b < ha e 2h 0 implies that d( (t)t) dt < 0 in the range t 2 T 4 . Hence, the maximum for (t)t is reached for t or t . Inserting ( 9) and ( 11) yields (t )t > (t )t if and only if (13) holds.

Intuitively, the individuals with little con…dence would like to maximize redistributed tax revenue as this is redistributed on a per capita basis. They face the usual La¤er-curve problem: a larger tax rate will reduce the tax base, because fewer of the more con…dent individuals invest. Given that the tax revenue is declining in the interior of T 2 and T 4 , the tax revenue curve (t)t peaks either at t or at t , and condition (13) discriminates between these two cases.

We now turn to the just con…dent group of individuals.

Proposition 3 The tax rate that is most preferred by individuals from group A 1 is t = 0 or t . They strictly prefer t = 0 if and only if

a ( 0 + 1 )b e > (ha h 0 b e) 0 ( 14
)
and t if the reverse inequality holds.

Proof. For t > t , individuals i 2 A 1 do not invest, and their pay-o¤ for this range of taxes is (t)t. By (12) (t)t is monotonically decreasing in t for t 2 T 4 and constant and equal to zero for even higher t. Moreover, (t)t is monotonically increasing in t for t 2 T 3 . Hence, t = arg max t2T 3 [T 4 [T 5 [ (t)t]. For t 2 T 1; individuals i 2 A 1 strictly prefer to invest in education. Their payo¤ is (a ( 0 + 1 )b e) (1 ( 0 + 1 ))t and strictly decreases in t. For t 2 T 2 , individuals are indi¤erent to whether to invest or not to invest. Accordingly, their payo¤ equals (t)t, and by ( 12) it decreases in t in this interval. Finally, the payo¤ is a continuous function of t at t . This shows that the just con…dent individuals strictly prefer t = 0 among all t 2 T 1 [ T 2 .

Whether i 2 A 1 prefers t = 0 or t = t , the equilibrium payo¤ for individuals i 2 A 1 for these taxes needs to be compared. The left-hand side in ( 14) is the payo¤ from t = 0 and the right-hand side of ( 14) is the payo¤ from t = t . Consider …nally i 2 A 0 . The following proposition holds for the group of individuals with high con…dence:

Proposition 4 The tax rate that is most preferred by individuals from group A 0 is t = 0 or some t 2 T 2 with t > t . Their most preferred tax is t

= t if h > a e b 2 0 + 1 (15)
and

(ha h 0 b e) (1 0 )[a 0 b e] > ha h( 0 + 1 )b e. ( 16
)
Proof. The perceived payo¤ of a highly con…dent individual from making the individually optimal choice to invest or not to invest is

(ha h (t)b e) (1 (t))t for t 2 T 1 [ T 3 [ T 3 (t)t for t 2 T 4 [ T 5 . ( 17
)
For t 2 T 1 , the equilibrium (t) = const: with respect to a small increase in t, and, hence, the payo¤ of the highly con…dent individuals (17) decreases in t for t 2 T 1 . All i 2 A 0 strictly prefer t = 0 to t = t . Also, for t 2 T 3 ; a similar argument applies, and t = t is strictly preferred to t = t . For t 2 T 4 [ T 5 ; all i 2 A 0 in the equilibrium weakly or strictly prefer not to invest. Their perceived payo¤ is therefore equal to (t)t in this range, and, by b < ha e 2h 0 from condition (12), (t)t is decreasing in t for t 2 T 4 and constant (and equal to zero) for t 2 T 5 . Among all t 2 T 3 [ T 4 [ T 5 , they strictly prefer t . All this together implies that the perceived payo¤ of i 2 A 0 must take its maximum on t = 0 or on some t 2 [t + ; t ], for some strictly positive , hence, for a tax that is strictly higher than t . This shows the …rst part of proposition 4.

In the range t 2 T 2 an increase in t increases the perceived gross income for i 2 A 0 by @(E i (a (t)b) e) @t = h, and it increases the individual's tax (net of transfers received) by @[1 (t))t] @t = 2t a+e b + 1. Accordingly, a corner solution at t = t is obtained if h 2(a 0 b e) a+e b 1 0, which condition can be written equivalently as (15). The condition (16) compares the perceived payo¤ at this tax t with the perceived payo¤ for t = 0.

Propositions 2, 3 and 4 characterize the tax rates that members of the respective groups prefer most. It seems to be plausible that members of the group A 2 who never invest in education, never pay the tax and simply receive redistributions from the total tax revenue prefer higher tax rates than other con…dence types. However, this is not generally the case: Figure 2: The most con…dent prefer t , the just con…dent prefer t = 0 and the invididuals with low con…dence prefer t with 0 < t < t in the shaded area which is drawn for 0 ! 0 and 1 = 0:75.

Proposition 5 If the set A 0 is su¢ ciently small then i 2 A 1 prefer the lowest tax rate t = 0, i 2 A 2 most prefer t , and i 2 A 0 most prefer a tax rate that may exceed the tax t . Their most preferred tax is t if h 1 > a e b and h 1 > a e b hold.

Proof. For a proof, consider 0 ! 0. For 0 = 0, condition (13) becomes 0 < a 1 b e, which is ful…lled by (3). Hence, by proposition 2, t is the most preferred tax for i 2 A 2 .

For 0 = 0, condition ( 14) reduces to the same condition 0 < a 1 b e. Hence, by proposition 3, t = 0 is the most preferred tax for i 2 A 1 .

For 0 = 0, for i 2 A 0 , the conditions (15) and ( 16) reduce to h > a e b + 1 and h 1 > a e b . Proposition 5 shows that the individuals with high con…dence who will invest in education and pay the tax may favor a higher tax than the just con…dent or even the individuals who have low con…dence and who never pay this tax but receive redistributions from it. It is important to notice that this range is non-empty. This is illustrated in Figure 2. The shaded area de…nes such a parameter range of h and (a e)=b. Conditions (3), ( 12), ( 13), ( 14), ( 15) and ( 16) must hold. For 0 ! 0, (3), ( 13) and ( 14) reduce to a e b > 1 . The …rst condition in ( 12) reduces to a e b > 2 1 , hence, a strightly tighter condition. The second condition in ( 12) is trivially ful…lled for 0 ! 0. Condition (15) reduces to a e b < h 1, and ( 16) to a e b < 1 h. The intuition for the result is perhaps more straightforward than the calculations that lead to proposition 5. Individuals with little con…dence who never invest in education would like to maximize the total tax revenue that can be redistributed, because this maximizes the transfers they receive. As is well known from standard La¤er curve arguments, the tax revenue is not maximized for the maximum tax that is feasible. People with high con…dence are guided by a di¤erent consideration. They know they will invest in education and expect a high wage premium from education. This premium will be higher, the smaller the number of other individuals who invest in education, as scarcity of human capital will drive up the wage premium from education. For this reason, they are willing to accept a considerable tax if this tax prevents a su¢ ciently large number of other individuals from investing in education, such that the increase in their expected gross wage premium from deterring others from investing in education exceeds their additional cost of tax payments required to make this deterrence e¤ective. Proposition 5, together with Figure 2, illustrates that this can really be the case and the analysis suggests that the full e¤ect is more likely to be at work if individuals with high con…dence are very con…dent, and if their number is small in comparison to the number of individuals who have an intermediate con…dence level.

Proposition 5 is a possibility result only, and, in its extreme format, it might perhaps be considered as less plausible. However, the result highlights a general and important e¤ect that applies even if the counterintuitive result of proposition 5 does not apply in a strict sense. High taxes on an education premium are less painful for those who invest in education, as there is a counterbalancing e¤ect. The higher tax reduces education investment and this drives up the scarcity rents for those who invest. This counterbalancing e¤ect may reduce the resistance to higher taxes even among those who invest in education and pay these taxes. From this perspective, proposition 5 mainly states that this counterbalancing e¤ect can be very strong, indeed.

The data and the empirical strategy

In this section we turn to the empirical relationship between perceptions about own ability and redistributional preferences. We use a data set that has been obtained from a survey of 2000 individuals that Thomas Piketty conducted in France in 1998 with …nancial support from the McArthur Foundation. 7 The data set contains 65 variables and includes income, many sociodemographic characteristics and answers to questions on social, political, ethical, and cultural issues.

In line with the theoretical analysis in sections 2 and 3 that considers individuals who choose their human capital investment and do not yet know whether their own investment will be successful, we consider only individuals aged 18-25. This reduces the size of the sub-sample used to 321 observations.

The endogenous variable to be explained is preferences for redistributive taxation, or the desire for redistribution. The data set provides several measures for an individual's preferences with regard to income redistribution. We concentrate on the following three questions to construct the variables we use. The …rst variable is the respondents'answer to the question "According to you, taxes should be increased or not?"(dumimp). The second and third variables are constructed from two questions regarding the monthly wage of a shopkeeper. One question is "According to you, what should the average monthly wage of a shopkeeper be?"(revsouhcaiss) and the other is "According to you, what is the average monthly wage of a shopkeeper?" (revcaiss). The answers to these questions were used by [START_REF] Piketty | Attitudes toward inequality in France: Do people really disagree?[END_REF] to construct an indirect measure of the desired redistribution. More precisely, we have used the answer to the question "what should be. . . " (revsouhcaiss) and the variable (revmoy) concerning the respondent's beliefs about the average household income. We do this in order to control for the possible di¤erences in individuals'perception of average incomes in the population. An alternative to this procedure has been to construct a new variable (di¤revsoucaiss) as the ratio: [revsouhcaiss] / [revcaiss]. This ratio solves the problem of con- 7 The survey « Attitudes towards inequality, France 1998 » was conceived by T. Piketty and …nanced by the MacArthur Foundation, within the Fondation's Research Network on the E¤ects of Inequality on Economic Performance. The survey was implemented as a special module to the survey « Conditions de vie et aspirations des Français » run by Credoc in june 1998 using a national representative sample of about 2000 individuals. For a detailed description see [START_REF] Piketty | Attitudes toward inequality in France: Do people really disagree?[END_REF] and the web: http://www.jourdan.ens.fr/piketty/ineg98/ineg98.htm.

trolling for the heterogeneity of the beliefs on the average household income level in a direct way.

We also conducted some estimates using other variables, e.g. opinrmi, de…ned as the answer to "According to you, the RMI (minimum income) should be increased, maintained, decreased, suppressed?", that look attractive at the …rst glance. We do not reproduce the estimation results here as the estimations turned out to be inconclusive.

We need an explanatory variable that measures the respondents' con…dence. For this purpose, we try to correctly identify the group of respondents, who, for the right or wrong reason, are very con…dent about their ability to turn human capital investment into own productivity, and use it to consider the explanatory power of high con…dence for the desire for redistribution. The data set allows for constructing several variables that can be considered as proxies for an individual's own perceptions about talent or the ability to turn human capital investment into high own productivity.

We constructed several variables to measure con…dence and report results only on the following four. The …rst measure of con…dence is based on the idea that highly con…dent individuals should self-select and choose to become students. Hence, we chose a dummy variable (dumstud) which takes value 1 if the respondent is a student, and zero otherwise. The second measure of con…dence uses the questions concerning the perceived determinants of own professional success: the respondent has been asked whether he/she thinks that success depends on e¤ort or, alternatively, on uncontrolable events. Based on this question, we de…ne the dummy explicreuss2 that is 1 if the respondent believes in e¤ort as the determinant of individual success and 0 otherwise. The dummy overconf1 is constructed by multiplying dumstud and explicreuss2. It captures the following condition of perceived high ability: student and believing in e¤ort as the determinant of own success. The third measure of con…dence uses respondents'answers with regard to their future prospects (how things will be in the next 5 years). The respective dummy variable is opin5ans2 and takes on the value 1 if the answer is "better than now" and 0 if the answer is "similar to or worse than now". Using this dummy, we construct the dummy (overconf2 ): student with positive/very positive future prospects. The fourth de…nition of high con…dence captures the students with positive future prospects who, in addition, believe in e¤ort as the reason for success (as in de…nition 2). To build the corresponding dummy (overcon¤utur), taking values 0 and 1, we simply multiply the dummies dumstud, opin5ans and explicreuss2.

Our empirical strategy is to test for the explanatory power of di¤erent de…nitions of con…dence for the preference for redistribution. The empirical relationship or reduced form model is as follows: the desire for redistributive taxation (or, alternatively, the intensity of redistribution preferences) is explained as a function of dummies that capture perceived own ability and other variables such as income and further socio-demographic variables. We use the measures of redistributional preferences discussed above as the endogenous variables, the various measures of con…dence as an explanatory variable, and use income, socio-demographic variables (age, gender, size of the area where the respondent lives, profession of the parents, etc.) as further controls.

In order to adjust a model for dumimp, given the binary nature of the variable, we estimate a discrete choice model (a probit in our case). When the endogenous variable was the question "what should the monthly wage be..."or the ratio di¤revsoucaiss we use an OLS regression.

In general, the estimations su¤ered from the small size of the sub-sample we used. In particular, the number of observations which have a "1" for the variables constructed in a more sophisticated way is small (see Table 1). Some of the empirical models we have estimated failed to pass the tests of robustness. In particular, in the case of the discrete choice models, we eliminated all the estimations with a predictive power lower than 80% (i.e. the percentage of correctly predicted 1 and 0 was lower than 0.8). Table 1 provides de…nitions of variables. In tables 2, 3 and 4, we present a selection of results that, in our opinion, are relevant from an econometric point of view. Also, we report only the variables and their respective coe¢ cients if the level of signi…cance is above 90 percent. In table 2 the dependent variable is the dummy about tax preferences (dumimp). In table 3 the endogenous variable is di¤revsoucaiss, the relation between the desired and estimated monthly wage of a shopkeeper as discussed above. Finally, in table 4, we use the question about shopkeeper monthly income (i.e: what should the monthly income of a shopkeeper be?) as a measure of attitude toward inequality.

The coe¢ cient of the income variable revfoy2 is negative and signi…cant in all these estimations. This result is in line with the related previous empirical …ndings and with economic intuition according to which low income earners expect to bene…t from redistribution. More surprisingly, in some cases, we …nd that the measure of perceived own high ability is positively correlated with the intensity of the taste for redistribution. This is particularly true in the case of the …rst de…nition of perceived own high ability in which, independently of the measure of the redistributive preferences used, the coe¢ cient of the dummy that captures high ability (dumstud) is always positive and signi…cant (at the 10 percent level), as reported in the …rst set of regressions in each table. This is in line with the view that individuals who perceive their own ability as high and, hence, self select to become students, may favor more redistribution.

However, we are very reluctant to draw any general conclusions. The empirical results are not very robust, the theoretical relation between con…dence and redistributional preferences has been shown to depend on distributional parameters that have no counterpart in the empirical estimation, and the qualitatively unambiguous empirical results can be assigned to a number of theoretical considerations. For instance, when we change the de…nition of the respondent's perception of own ability, the coe¢ cients of the corresponding dummies are not signi…cant (see the second set of results in table 2 and all the other regressions of table 4). Still, dumstud remains signi…cant and with a positive sign: the probability of having high redistributive preferences is positively a¤ected by the choice of being a student. Moreover, using the ratio di¤revsouhcaiss as a measure of redistributive preference and the status student and believing in e¤ort as the de…nition of perceptions of high own ability (second set of regressions in table 3), we get that the coe¢ cient of dumstud still remain positive and signi…cant but, the coe¢ cient of the dummy overconf1 appears to be signi…cant and negative.

To conclude, the relationship between perceived own ability and preferences for income redistribution is not straightforward, but we could show that the two variables are not necessarily negatively correlated.

Conclusions

Individuals who perceive their own talent to be very high may favor a high income tax as a barrier to entry that prevents those individuals investing in education, who perceive their own ability to be less high. The tax reduces the share of individuals who invest in human capital and increases the scarcity rent that accrues to those individuals who invest. We showed that this e¤ect can, but need not, dominate its cost in terms of the high taxes to be paid that comes along with this policy. As a result, individuals who are very con…dent about their own ability may prefer taxes that are even higher than those wanted by people who bene…t from the increased redistribution that is …nanced by these taxes. The empirical implication of the result is that highly con…dent individuals should articulate a preference for more redistribution. We cannot test a very speci…c hypothesis in the empirical analysis, but we do …nd evidence that, for this or other reasons, is in line with the theoretical results. Overall the result can be interpreted as showing that there is no general con ‡ict between the poor and uneducated on the one side and the rich and educated on the other, with the former asking for more redistribution and the latter for less, but that there are forces that can make the opposite redistributional preferences possible.

Table 2 .

 2 Measure of attitude toward inequality: question about taxes (dumimp).Probit, dependent variable: dumimp (1 if more taxes, 0 otherwise).

	definition of high confidence	age 18-25 and student		age 18-25, student believing in effort
		Coef.	Std. Err.	P > z	Coef.	Std. Err.	P > z
	revfoy2	-1.76E-06	9.02E-07	0.052	-1.78E-06	9.09E-07	0.000
	dumstud	0.3741264	0.2131325	0.079	0.398167	0.2397785	0.097
	explicreuss2				-0.0898737	0.2265374	0.692
	overconf1				-0.1004084	0.3740957	0.788
	age	0.0620315	0.0415555	0.136		0.0607089	0.0419

Table 3 .

 3 Measure of attitude toward inequality: relation between the desired and estimated (by the respondent) monthly wage of a shopkeeper (i.e: Which should be the monthly income of a shopkeeper?/ Which is the monthly income of a shopkeeper?). Ordinary Least Squares. Dependent variable: diffrevsouhcaiss.

	definition

of high confidence age 18-25 and student age 18-25, student believing in effort

		Coef.	Std. Err.	P > z	Coef.	Std. Err.	P > z
	revfoy2	-2.26E-07	1.48E-07	0.128	-2.37E-07	1.43E-07	0.099
	dumstud	0.0661108	0.0372335	0.077	0.0967393	0.0424295	0.024
	explicreuss2				-0.0225034	0.0341603	0.511
	overconf1				-0.11994	0.0584527	0.041
	_Iprofpere-2	0.0754316	0.042328	0.076	0.0700318	0.0409939	0.089
	age	0.017502	0.0066796	0.009	0.016824	0.0064848	0.01
	_cons	0.8683943	0.160896	0	0.8864374	0.1567114	0

Table 4 .

 4 Measure of attitude toward inequality: question about shopkeeper monthly income (i.e: Which should be the monthly income of a shopkeeper?). OLS. Dependent variable: revsouhcaiss.

	definition of high confidence	age 18-

25 and student age 18-25, student believing in effort age 18-25, student and positive/very positive on his future condition (next 5 years) age 18-25, student, believing in effort and positive/very positive on his future condition (next 5 years)

		Coef.	Std. Err.	P > z	Coef.	Std. Err.	P > z	Coef.	Std. Err.	P > z	Coef.	Std. Err.	P > z
	revmoy	0.071396 0.0189503	0	0.0740287 0.0192782	0 0.0773396	0.018718	0	0.0736915 0.0187817	0
	revfoy2	-0.0002895 0.0008303 0.728	-0.0001126 0.0008182	0.891	0.000088 0.0008468	0.917	-0.0006818 0.0008919 0.445
	dumstud	672.0402	246.5485 0.007	798.4154	280.2058	0.005	746.3918	321.3293	0.021	723.2077	267.7921 0.007
	explicreuss2				-54.41921	237.3512	0.819				-35.812	216.517 0.869
	opin5ans2							149.294	212.3613	0.483	170.0322	184.8875 0.359
	overconf1				-423.3885	423.2037	0.318
	overconf2							-51.33481	378.4187	0.892
	overconfid-r										-646.4981	523.4482 0.218
	_Iprofpere-2	760.3251	284.3135 0.008	723.0515	283.0438	0.011	677.1683	288.2462	0.02	566.2561	297.6039 0.058
	_Iprofmere-4	333.2898	360.4273 0.356	408.1264	356.2426	0.253	645.4761	345.6986	0.063	854.1951	440.9801 0.054
	_cons	5006.517	1124.001	0	4766.594	1109.858	0	4429.689	1151.394	0	3977.047	1124.134	0

A policy of public enforcement of redistribution is typically derived from these motivations in order to overcome the free-rider problem that emerges in the context of voluntary redistribution among the group of well-o¤ who may all bene…t if the poor receive more support that has been highlighted byHochman and Rogers (1974).

3 Insurance aspects of redistributive taxation (e.g.,[START_REF] Varian | Redistributive taxation as social insurance[END_REF][START_REF] Sinn | Social insurance, incentives and risk taking[END_REF] and other means that make the wage distribution more egalitarian (see, e.g.,[START_REF] Agell | Union egalitarianism as income insurance[END_REF] for an analysis of wage compression) have received considerable attention. We will assume risk neutral individuals throughout, in order to isolate and highlight the e¤ects we consider.

Piketty for his valuable comments on a previous version and for allowing us to work with the French dataset. The usual caveat applies. Spadaro acknowledges …nancial support of Spanish Government-MCYT (-02606 and HP2002-0031).


Irena Grosfeld
email: grosfeld@pse.ens.fr

Iraj Hashi

The emergence of large shareholders in mass privatised firms: Evidence from Poland and the Czech Republic

Keywords: G3, L2, P3, P5 ownership concentration, mass privatisation, corporate governance, transition ownership concentration, mass privatisation, corporate governance, transition JEL Classification: G3, L:2, P3, P5

Résumé

Nous étudions deux programmes de privatisation de masse, en Pologne et en République tchèque, et montrons que les structures de l'actionnariat dans les deux pays ont rapidement évolué depuis la distribution initiale des droits de propriété. La concentration du capital a fortement augmenté et nous observons une reallocation significative entre les différents groupes d'actionnaires. Ce résultat va à l'encontre de la critique principale adressée aux programmes de privatisation de masse, mettant en garde contre la dispersion du capital qu'ils devraient entraîner.

Le fait que le degré de la concentration du capital est similaire en Pologne et en République tchèque suggère que les bénéfices privés de contrôle soient importants dans les deux pays. Cependant, lorsque nous analysons les déterminants de la concentration de la propriété nous trouvons une différence importante : en République tchèque il est moins probable que le capital est plus concentré dans les entreprises moins performantes tandis qu'en Pologne la qualité de la performance passée n'affecte pas la volonté des investisseurs d'augmenter leurs participations. Cet effet contrasté peut être interprété à la lumière de la théorie mettant accent sur l'importance de la qualité du système légal pour le comportement des investisseurs : la Pologne est d'habitude louée pour la rigueur de sa régulation tandis que la République tchèque, notamment au début des années 90, a été blâmée pour sa faiblesse. Ainsi, bien que la comparaison directe de la concentration du capital dans les deux pays ne permette pas de confirmer l'une des prédictions principales de la théorie 'law matters', nous trouvons une confirmation indirecte en sa faveur.

Abstract

Focusing on two different mass privatization schemes in two transition economies, Poland and the Czech Republic, we show that the ownership structure in the two countries has rapidly evolved since the initial distribution of property rights Ownership concentration has significantly increased and we can observe an important reallocation of ownership claims between different groups of shareholders. This evidence goes against the main argument of the critics of mass privatization concerned with the dispersed ownership structure these programs were supposed to generate.

The fact that the degree of ownership concentration is similar in Poland and in the Czech Republic suggests that private benefits of control are large in both countries. However, when we consider the determinants of ownership concentration we find an interesting difference: in the Czech Republic the increase in ownership concentration is less likely in poorly performing firms while in Poland the quality of past performance does not affect investors' willingness to increase their holdings. This contrasting effect may be interpreted in the light of the theory stressing the importance of the quality of the legal system for investors' behaviour: Poland is usually praised for high standards of its regulation while the Czech Republic, especially in the early and mid-1990s, has been blamed for its weaknesses. So, although direct comparison of ownership concentration in the two countries does not provide confirmation of the main prediction of 'law matters' theory, we find indirect evidence in its favour. .

Introduction 1

Privatisation in Central and Eastern Europe strongly relied on 'wholesale' methods to transfer assets from the state to the private sector. These strategies, often qualified as 'mass privatization', consisted of a free transfer of equity of a large number of firms to large segments of the population. Since the beginning of transition, mass privatization has been strongly criticised as being 'artificial' and unable to provide firms with 'real owners' or to improve firm performance. One of the main criticisms concerned the dispersed ownership structure that mass privatisation was expected to generate. Some countries, e.g. Poland, sensitive to this argument, chose to impose a concentrated ownership structure on privatized firms. The main concern was avoiding excessive dispersion of ownership and providing companies with 'effective owners', capable and willing to enforce control over management and undertake profound firm restructuring. In other countries, such as the Czech Republic, where privatization was understood as the key element of the process of radical institutional change and was expected to create important synergies, the main concern was the speed of the process and less attention was paid to the emergence of a specific ownership structure.

Several years after the initial distribution of firms' equity, it is still largely believed that mass privatization schemes were plagued with inefficiencies mostly due to rigid and/or inefficient ownership structure. However, if we look at the actual change at firm level it turns out that the effective reallocation of property rights has been quite extensive and that the ownership concentration has significantly increased.2 Therefore, it becomes interesting to describe this evolution in detail and to explore if and how ownership structure adjusted to firm specific characteristics and to factors characterizing the firm's environment.

It should be stressed that the objective of this paper is quite modest. We do not try to assess whether and how ownership structure affects performance. Neither have we distinguished the managerial ownership dimension of ownership structure. These are important questions that have been studied by a number of authors and also need to be investigated further. [START_REF]Some of recent empirical papers include McConnell and Servaes[END_REF] In focusing on the determinants of ownership concentration we follow the literature initiated by Demsetz (1983) and Demsetz and Lehn (1985) who argued that ownership structure should be viewed as the result of shareholders' optimizing decisions. [START_REF] Bebchuk | Demsetz and Villalonga[END_REF] Considering the determinants of ownership concentration may be viewed as a first step. The next and an important extension of this paper would be to consider the relationship between ownership and firm performance in a simultaneous equation framework: in such framework with firm performance and ownership concentration being the two dependent variables, we could consider potential causality running form ownership to performance.

We focus on firms privatized through two different mass privatization schemes in two transition economies, Poland and the Czech Republic. Mass privatization offers a particularly suitable framework to study the change in ownership concentration as the extent of change is unusual for a stable market economy. We find that despite important differences in the design of the two programmes and despite different quality of legal and regulatory framework, ownership structure in the two countries has rapidly evolved and the emerging ownership patterns are remarkably s imilar. Ownership concentration has significantly increased and we can observe an important reallocation of ownership claims between different groups of shareholders. In the Czech Republic, starting from a highly dispersed ownership structure, in almost half of companies a majority of shares is held by a single block holder. Similarly in Poland, starting from a particular ownership structure imposed by the National Investment Funds (NIF) programme, the majority of companies involved in the scheme have been freed of NIFs' control and almost half of them have found a single block holding entity with a majority of shares. Ownership concentration, defined as the presence of a majority shareholder or the increase in the share of the largest owner, seems to be mainly determined by firms' past performance and by the identity of the largest owner.

The difference between the two countries appears when we consider how past performance affects the increase in ownership concentration: it turns out that the impact of past performance is positive in the Czech Republic and insignificant or even negative in Poland. This suggests that in Poland shareholders believe they can obtain some benefits of control and do not fear increasing their holdings in less profitable firms while in the Czech Republic less profitable firms are considered as too risky and shareholders prefer increasing their equity holdings in better performing firms. Such result may be interpreted in the light of "law matters" theory due to La Porta, et al. (1998). 5 The difference in the shareholders' attitude towards risk in the two countries may indeed be due to the differences in the quality of the legal framework. Poland is usually praised for high standards of its regulation while the Czech Republic, especially in the early and mid-1990s, has been blamed for its weaknesses (see Glaeser, et al., 2001) The evidence of a dynamic adjustment of the ownership structure provided in this paper suggests that, contrary to the concern of the critics of mass privatisation programmes, they were not the most inefficient way of transferring assets from the state to the public sector. The initial ownership structure they created was transitory and rapidly gave way to new configurations. This evidence may help to explain the apparently surprising result of Bennett, et al. (2004). Analyzing the impact of various privatization methods on economic growth in a cross-country setting, they find that mass privatization was the only method with a significantly positive effect. Although we do not consider here the relationship between privatization and performance, the fact that ownership structure in our firms has become highly concentrated may provide an element of explanation.

The plan of the paper is as follows. In section 2 we present the two mass privatization schemes in Poland and in the Czech Republic and show how ownership concentration and the type of the controlling shareholders have changed since the beginning of the process. In section 3 we consider the potential determinants of ownership concentration. Empirical model is presented in section 4, the results in section 5 and we conclude in section 6.

Mass Privatisation and after: reallocation of equity stakes in the Czech

Republic and Poland.

Despite broad similarity of their reform programme, Poland and the Czech Republic embarked on two different variants of mass privatisation (briefly described in Appendix 1).

Various political and social considerations played a role. Most importantly, the choice was determined by the policy makers' understanding of the role of privatisation in market processes. In Poland privatisation was seen as a means of improving firm incentives and its real objective was firm restructuring. More orthodox methods of privatisation (IPOs, negotiated sales, auctions, etc.) were seen as more efficient from that point of view, but it soon became clear that privatisation would be too slow if it were to rely exclusively on such methods. Therefore, the National Investment Funds (NIF) programme was initiated to supplement other methods and speed up the process. The design of this programme was dominated by the concern about corporate governance arrangements favouring enterprise restructuring. In particular, a concentrated ownership structure was imposed on firms and the funds were to be managed by highly experienced Western specialists.

In the Czech Republic (and before that in Czechoslovakia) privatisation was understood as the precondition for the emergence of a market environment. Voucher privatisation was seen as the most rapid and the least unfair way of transferring assets from the State sector. It was expected that under competitive pressure the initial ownership structure would gradually evolve towards a more effective structure.

The two different philosophies underlying the two mass privatisation programmes are reflected in the design of the regulations of securities markets in the two countries. Poland is usually given as an example of a good regulatory strategy while the Czech Republic is blamed for the weakness of its regulatory framework (Glaeser, et al., 2001). Indeed, the Polish authorities were concerned with the proper development of financial markets in general, and the stock exchange in particular, and focused on the creation of a well established legal system and enforceable laws. In the NIF programme, the remuneration scheme for NIF managers and the stock exchange listing requirements were carefully designed to ensure the transparency of the process and to avoid expropriation of minority investors. The main concern was to avoid excessive dispersion of ownership and to provide companies with 'effective owners'. But the authors of the programme were also concerned with the potential danger of private benefits of control and therefore imposed t he limit of 33 percent on the lead fund's holdings in each company.

Such guarantees were deemed unnecessary in the Czech Republic: there was a fear that state intervention would create impediments to a rapid development of market institutions. The Company law and the laws governing the operation of securities markets were very lax and the supervision of securities trading and the associated agents were, until 1998, left to a Securities Office in the Ministry of Finance. Privatised companies were listed on the stock exchange without having to publish a prospectus and to obtain the approval of the securities regulator. The increasing number of financial scandals and opportunistic behaviour involving funds and enterprise managers (later called 'tunnelling') reflected the weakness of the regulatory framework. 6 The pressure from the opposition parties and the press eventually forced the government to establish the Securities Commission.

The Data

The data for Czech companies is provided by a Czech commercial c ompany, Aspekt (www.aspekt.cz) who use official company accounts filed by joint stock companies (for financial information), Prague Securities Centre (for ownership information), and company reports for employment and other information. The financial data covers the period of 1993-1999 while the ownership data covers the period 1996 to 1999. The data-set was purchased in early 2000 and consequently the information for 1999 is not complete for all companies. The ownership data includes the identity and the e quity holdings of up to seven largest shareholders of each company since 1996. There are five types of owners: industrial and commercial c ompanies (corporations), investment funds, financial institutions, 7 individuals and the state. The database does not identify foreign ownership.

6

For examples of opportunistic behaviour by managers and large shareholders, see Hashi (1998); Johnson, et al. (2000) and Glaeser, et al. (2001). 7 The data set contained two sub-groups of financial institutions: portfolio companies (which are engaged primarily in buying and selling of shares) and banks. However, as the number of firms in these two sub-groups was small, they were combined together under 'financial institutions' in order to make the empirical work more meaningful.

The data set contains financial information on the bulk of mass privatised companies but the ownership information is limited to a smaller number of companies because many mass privatised companies have left the stock exchange, changed their legal status or have been taken over by other companies. After careful cleaning of the data base (involving the deletion of observations containing obvious errors) we established a balanced panel of 652 companies for which full ownership information is available for the 1996-1999 period. 8 The sample is well distributed across 12 sectors of economic activity. 9

The Polish data set, containing all 512 mass privatised companies and covering the 1995-2000 period, was collected from several sources. The Ministry of State Treasury (Department of Privatisation) keeps some basic data on the 512 companies in the National Investment Fund Programme, largely for the period before their privatisation. The Department keeps a record of major changes in the status of these companies. Additional information was collected from the annual reports of NIFs and their portfolio companies through the publication Monitor Polski, NIFs' annual reports and the reports of the Association of National Investment Funds.

For companies that have been floated on the stock exchange, further information was obtained from the Warsaw Stock Exchange. In the final sample analyzed in this paper we do not include firms that went bankrupt or for some reasons were deleted from the registry kept in the Ministry of State Treasury. We also exclude observations with missing data. The number of firms in the sample was therefore reduced to 439.

Unlike in the Czech Republic, the initial ownership structure of the companies in the mass privatisation scheme was uniform and fixed by the scheme (the lead fund had 33 percent of shares; other 14 funds 27 percent; employees 15 percent and the state 25 percent). The information on ownership change throughout the period 1995-2000, collected from the variety of sources described above, allows identifying the largest owners of the companies. It shows the extent of the divestiture by NIFs. The distinction is made between foreign and domestic shareholders; among the latter there are companies, NIFs, employees, individuals and the state.

8 There are occasionally missing observations for individual variables which lowers the number of observations to 610 in the regressions presented in Section 5. 9 Originally firms were grouped into 19 activities based on Prague Stock Exchange classification of sectoral activity (which closely resembles NACE classification) but as the number of firms in some

Changes in the ownership structure

We focus on two dimensions of the change in the ownership structure. First, we look at ownership concentration, measured by the share of the largest owner. Second, we consider the reallocation of block holdings between different types of owners. The evidence from both Poland and the Czech Republic points to an unambiguous increase in concentration of ownership in both countries. Table 1 highlights the broad picture of this evolution.

The average holdings of the largest shareholder in the Czech sample increased rapidly from 38.8 percent in 1996 to 51.9 percent in 1999 and in the Polish sample from 33.9 percent in 1996 to 50.3 percent in 2000. In the Czech Republic the median figure indicates that by 1999 in half of the sample firms the largest owner held almost 50 percent of the firm's equity. The number of firms in which the largest shareholder controls more than 50 percent of shares increased indeed from 189 in 1996 to 289 in 1999.

The Polish scheme, due to its cautious design, had a degree of inertia built into it. Dominant owners, i.e., the 'lead funds' holding 33 percent of company shares initially, could not increase their share in portfolio companies until they were floated on the stock market or their capital was increased. At the same time, companies could not be floated on the stock market until they could meet (as any listed company) the stringent listing criteria set by the regulatory agency. Despite these restrictions, a significant reallocation of equity holdings, triggered by a combination of the NIFs' incentive system and the competitive pressure from the product and factor markets, occurred quite rapidly. NIFs have withdrawn from managing a large number of portfolio companies. Some firms were floated on the stock exchange, others were sold to strategic (domestic or foreign) investors, and some were put into liquidation. NIFs proved to be the agents of privatisation rather than agents of restructuring. The net results, as panel (b) of Table 1 shows, were that by the year 2000, the largest shareholders were, on average, in absolute control of their companies. The differences in the initial ownership structure notwithstanding, the process was very similar to that in the Czech Republic.

The second dimension of the change in the ownership structure is the reallocation of ownership rights between different types of largest shareholders. This process was different in sectors was very small, for reasons of empirical feasibility, we grouped firms in similar activities and the two samples because of the particularities of the privatization process in the two countries and the initially uniform ownership structure of the Polish firm. In Poland, the reallocation of ownership was first dominated by the transfer from the state to NIFs and then from NIFs to other types of owners. While in 1994 all firms were state-owned, by 2000 the state had reduced its holdings to zero in 99 firms and to about 20 percent (on average) in the remaining firms. A bout 15 percent of the companies in the scheme went bankrupt or entered the bankruptcy or liquidation processes. 36 companies (about 7 percent of the companies in the scheme, 25 of them with strategic investors) have satisfied the listing conditions set by the Warsaw Stock Exchange and were quoted on the WSE in 2000.

Tables 2 and3 show how equity held by different types of the largest owner has evolved in Poland between 1998 and 2000 and in the Czech Republic between 1996 and 1999. In Poland NIFs have withdrawn from 240 firms leaving the companies to the new owner, with over 20 percent of them (52 companies) having been sold to foreign investors. Concerning the concentration of ownership stakes, it is striking that, on average, most strategic investors have gained majority control of the firms' equity. Only NIFs, on average, hold 37 percent of shares of their portfolio companies. The employees, who were given special privileges in the Polish mass privatization, have acquired control of 13 companies. The highest ownership concentration (75 percent) can be observed in firms bought by foreign investors.

Similarly, in the Czech Republic we can observe a gradual process of reallocation of large block holdings between different types of owners. In the immediate post-privatization period, the state, financial institutions and investment funds were the most important large

What makes ownership more or less concentrated?

We look at within country variations in ownership structure which means that we do not consider here the important issue on which the work by La Porta, et al. (1998) focused:10 legal and regulatory constraints are held constant. We try to identify the determinants of ownership concentration at the level of the firm. We use two dummy variables for ownership concentration: 1) the increase/decrease of the share of the largest owner since the initial allocation of property rights, and 2) the presence/absence of a majority shareholder (holding more than 50 percent of shares).

In line with several previous studies investigating the determinants of ownership concentration, we expect the following factors to influence our two dependent variables:

Performance

Owners' decision to increase their holding may depend on firm performance. It is possible that in less profitable firms shareholders want to increase their holdings in order to better control the management and obtain some of the benefits of control. On the other hand, such firms may be less attractive for risk-averse shareholders looking for risk diversification. The impact of performance on owners' decision to concentrate their holdings is therefore ambiguous. 11 It is difficult to choose an ideal performance indicator for non-listed firms in transition economies. We use earnings before taxes and depreciation which is the commonly used measure. A lternatively, we use the growth of sales as a measure of performance: it is sometimes argued that it is less subject to accounting manipulations. Additionally, we include investment which may be considered as a proxy for the future prospects of the firm. W e expect that higher investment activity leads current and potential shareholders to increase their holdings in the firm.

Size

It is usually expected that ownership in larger firms is less likely to be highly concentrated.

Purchasing large equity shares in a large company is more expensive than doing the same in a smaller company. Moreover, the concern for diversification also suggests that owners will be careful and refrain from committing a larger fraction of their wealth to one firm. In some previous studies (e.g. Demsetz and Lehn, 1985) firm size was inversely related to ownership concentration. On the other hand, in the highly uncertain conditions of transition economies, larger, older and better known firms may be perceived by some shareholders as l ess likely to go bankrupt. In this case, such shareholders would increase their shareholding in larger firms.

The overall impact of size on ownership structure may thus be ambiguous.

Leverage

Also the effect of leverage on ownership concentration may be ambiguous. Highly leveraged firms are more risky and risk averse owners may prefer avoiding excessive concentration in such firms (Stulz 1988, Demsetz and Lehn, 1985). Similarly, if leverage is seen as a control instrument used to reduce agency costs and creditors substitute owners in their monitoring activities, we would expect ownership concentration to be lower in more leveraged firms. But debt may also be viewed as complementary monitoring device: in that case higher ownership concentration may appear in more indebted companies.

Identity of the dominant shareholder

The degree of ownership concentration may strongly depend on who the largest shareholder is. It is therefore important to distinguish between different types of block holders. For example, a corporation may have stronger motivation than a financial institution to acquire large stakes in a firm. The state and the National Investment Funds in Poland are supposed to wither away as owners and we expect that their equity will progressively diminish. The nationality of the dominant owners may also affect ownership concentration: foreign owners may be more willing and capable of acquiring larger stakes in order to control the company.

In Poland we can distinguish between foreign and domestic investors; and among the latter between corporations, individuals, employees, NIFs and the state. In the Czech Republic we can distinguish between corporations, individuals, investment funds, financial institutions, and the state.

Industry

Ownership concentration may vary across industries. Some industries are more likely to have dispersed ownership than others. One of the possible explanations of these differences would be that different types of activities require different level of monitoring. 12 In some industries closer monitoring may bring about gains to shareholders 13 while in others, especially those regulated by the state, additional monitoring by large shareholders may not yield any benefits. 14 Hence, we have to control for the type of the industry in order to take this effect into account.

12 See Carlin and Mayer (1999) and Allen (1993). 13 Demsetz and Lehn (1985) call it 'control potential ' and Bebchuk (1999) speaks about private benefits of control. 14 Demsetz and Lehn (1985) and Demsetz and Villalonga (2001, e.g., control for regulated industries (financial and utilities).

The model

We analyse the determinants of ownership concentration using two dependent variables. First, we estimate the probability that the share of the largest owner has increased since the initial allocation of equity stakes (Y 1 ). This was the case in 491 firms in the Czech Republic and in 219 firms in Poland. Secondly, we estimate the probability that a company has a majority shareholder at the end of the considered period (Y 2 ). In our samples, 44 percent of firms in Poland in 2000 and 49 percent in the Czech Republic in 1999 have a shareholder with more than 50 percent of shares.

We use the following general model to identify the factors that affect our dependent variables:

P (Y j =1/ X ) = ) exp( 1 ) exp( β β X X +
Where j=1, 2. P (Y 1 = 1/ X ) is the probability that the share of the largest owner has increased since the beginning of the process and P (Y 2 = 1/ X ) is the probability that the largest owner holds more than 50 percent of shares, both conditioned on the realization of X , which represents the vector of explanatory variables and β is the corresponding vector of coefficients.

The vector of explanatory variables X includes the following variables: performance, size, leverage, investment, type of the largest owner, industry, and a set of variables representing specific features of mass privatisation in the two countries.

Performance is defined as ratio of earnings before taxes and depreciation to total assets (the growth of sales is used as another proxy for performance); size is measured by natural logarithm of sales in constant prices; leverage is defined as total liabilities over total assets; investment is the ratio of net investment in fixed assets to total assets. In order to alleviate the problem of potential endogeneity of ownership concentration, the four variables (performance, size, leverage and investment) are averaged over the period ending one year earlier than the year for which ownership is considered. (i.e., 1996-1998 for the Czech sample and 1995-1999 for the Polish sample). Type of owner is a set of dummies representing different types o f the largest shareholder. Industry represents a set of dummies for industries to which the firm belongs (12 for Czech firms and 20 in Poland).

In the case of the Czech Republic we want to distinguish between firms that were privatised in the first and i n the second wave of the voucher scheme. We also include the initial level of ownership concentration (in 1996). 15 We obviously expect that the increase in ownership concentration will be less likely in firms that were initially already highly concentrated. Such firms are also more likely to have at the end of the process a majority investor. In Poland, the initial level of ownership concentration was by design the same for all firms so we do not include this variable in the regressions. In the case of Polish mass privatised firms we distinguish between listed and non-listed firms by using a dummy variable for firms that are listed on the Warsaw Stock Exchange (WSE). It may be expected that firms listed on the stock exchange are more likely to have widely held share ownership structure. We also want to distinguish between various National Investment Funds and we include a set of dummies representing the lead National Investment Fund of each company (15 NIFs altogether). We know that these funds differed in their strategies towards firms in their portfolios: some funds behaved more like venture capital funds while others chose strategies of purely financial intermediaries. Firms' ownership concentration might have been influenced by these strategies. The full list of variables is presented in Table 4.

The results

Tables 5 and6 show respectively the results for Poland and for the Czech Republic. For each of the two dependent variables we present two sets of regressions: with and without dummies representing the type of the largest shareholder. For Poland additionally, before adding all types of domestic owners, we show, in columns 2 and 5 the results of the regression in which only foreign versus domestic owner is considered.

The inclusion of the type of the largest owner significantly improves the explanatory power of the regressions, particularly in Poland. In both countries most of the coefficients of the 15 Ownership concentration is measured by the share of the largest shareholder. In the regression analysis, we use a logistic transformation of this measure. See table 4 for the exact definition.

dummies representing the type of the largest owner are significant. 16 In particular, in Poland the f irm is significantly more likely to be majority controlled if it has a foreign largest shareholder. The presence of a foreign dominant shareholder also significantly influences the probability of an increase in its equity holdings. Interpreting the coefficients of various dummies representing the types of owners we should remember that the reference group is the state in the Czech Republic and the state together with NIFs in Poland .These types of owners are supposed to wither away and therefore it is not surprising that other categories are more likely to increase their equity holdings and to take majority control.

We do not observe a significant relationship between ownership concentration and either leverage or investment. But some of the privatisation-related variables turn out to be quite important. Firms listed on the Warsaw Stock Exchange are less likely to experience increasing concentration and are less likely to have a majority owner. It could be argued that ownership dispersion is safer in listed firms as investors have access to a much greater amount of information and also a certain amount of monitoring is undertaken by the financial market itself. So the opportunities for reaping the benefits of control by increasing ownership concentration and monitoring are more limited. Moreover, according to the regulation of the WSE, beyond a certain level of ownership concentration, the dominant shareholders have to make compulsory purchase offers to other shareholders, which may require a prohibitively large amount of resources. In the Czech Republic, as expected, the higher the initial level of ownership concentration, the lower the probability that the share of the largest shareholder has increased and the higher the probability that the firm has found a majority owner.

The evidence about the importance of firm size is mixed: it becomes insignificant in Poland when all types of largest owners are included and only slightly positive in the Czech Republic. This result suggests that the desire of diversification and the search for a safe investment (which large firms may offer in an uncertain environment) counteract each other.

More importantly, we get a contrasting result comparing the correlation between firms' past performance and ownership concentration in the two countries. In Poland firm's past performance does not seem to affect the probability of the increase in the share of the largest 16 Only in the Czech Republic the presence/absence of a majority shareholder is not affected by the largest shareholder being an individual or an investment fund. These two categories of owners were the m ain players in the auctions of the voucher scheme and their behaviour might not differ significantly from the state, which is here the base group.

owner (it is even slightly negative if we do not control for the type of the largest owner). Also, the presence of a majority shareholder is more likely in firms characterized by poor past profitability. In contrast, in the Czech Republic the coefficient of past profitability is positive and affects very strongly the probability that the share of the largest owner has increased. This result may reflect the owners' willingness to avoid increasing their equity holdings in the Czech poorly performing firms. In Poland, investors appear more likely trying to reap some benefits of control.17

The results are robust to the use of an alternative measure of firm performance: the growth of sales, and an alternative measure of firm size: the natural logarithm of the value of assets. 18

Conclusions

In firms privatized in the framework of mass privatization programmes in Poland and the Czech Republic we observe a significant increase in ownership concentration measured by the share of the largest owner. This evidence goes against the main argument of the critics of mass privatization programmes who were convinced that these programmes would bring about dispersed ownership structure at firm level. The fact that the evolution of ownership concentration is similar in Poland and in the Czech Republic suggests that private benefits of control are large in both countries (see Bebchuk, 1999). If we refer to 'law matters' theory, this suggests that the quality of investor protection regime is rather low in both countries. So we do not get a confirmation of the usual view that the Polish legal and regulatory framework is much better than the one in the Czech Republic. However, although the direct comparison of ownership concentration in the two countries does not provide a confirmation of the main prediction of 'law matters' theory, we find indirect evidence in its favour.

Looking at the relationship between the change in ownership concentration and firm performance, we find an interesting result: in the Czech Republic the increase in ownership concentration seems to be less likely in poorly performing firms while in Poland the quality of past performance does not affect investors' willingness to increase their holdings. This contrasting effect may be interpreted in the light of the theory stressing the importance of the quality of investors' protection. It could be argued indeed that if Czech investors seem to be more risk averse and more concerned with diversification this is largely due to the weakness of the legal protection they face. 18 The results are available on request.

reorganisation of funds' portfolios, quickly followed the two waves -a process generally referred to as the 'third wave' of privatisation. Investment funds, despite their large overall stakes, were generally not in a controlling position in their portfolio companies. Many funds had ended up with shares of too many companies and w anted to reduce the size of their portfolios. Many individual shareholders, preferring cash to risky shares, also entered the secondary market, selling their shares, thus further pushing down share prices. 20 A major feature of the so-called third wave of privatisation was the take-over of investment funds.

Given that PIFs (especially those set up in the first wave) were joint stock companies with a large number of shareholders, they were easy targets for aggressive bidders. 19 For details of the Czech privatization see Mejstrik (1997). 20 It was estimated that in the early post-privatization period up to one-third of individuals who had obtained shares in the voucher scheme sold their shares. See The Economist Intelligence Unit, Country Report, 2nd Quarter 1995, p. 15.

Mass Privatisation in Poland

The scale of the Polish mass privatisation was less spectacular than the Czech scheme. It included 512 companies and 15 National Investment Funds (NIF), which were set up by the Government. 21 The management of these funds was initially entrusted to special consortia of Western and Polish partners (commercial banks, investment banks, consulting firms) selected through an international tender offer. The implementation of the programme was delayed by at least four years (1991-95) for political reasons, mainly the absence of a consensus in the government and the parliament about the final list of companies in the scheme, the precise share of different beneficiaries and the specific arrangements concerning corporate governance of the NIFs. The equity of 512 companies was transferred from the state to new owners according to a common scheme: the majority of shares of each company (60 percent)

were given to the 15 National Investment Funds, with the remaining 40 percent going to employees (15 percent) and the Treasury (25 percent). For each company, one of the 15 NIFs received 33 percent of shares and thus became the 'lead fund' for that company. The remaining 27 percent were divided between the other 14 funds (each holding just under 2 percent of shares). This uniform scheme sharply contrasted with the Czech programme where the outcome of the bidding process was completely unforeseeable and any number of funds, individuals and other beneficiaries could end up as new owners of the companies.

Foreign financial institutions were invited to participate in the programme and, together with Polish institutions, bid for the management of NIFs under lucrative remuneration arrangements. The aim was to bring in the fund management know-how and expertise and ensure that Polish institutions learn from their foreign partners. At the same time, foreign institutions with international reputation were expected to follow the same practice as in their own countries, and not to engage in opportunistic behavior, insider dealing and shareholder expropriation which their inexperienced Polish counterparts may have been tempted to embark on. Many foreign institutions did take part in the programme and most NIFs started to be managed by consortia of foreign and Polish institutions.

21

For details of the Polish mass privatisation, see Hashi (2000) and Mickiewicz and Baltowski (2003).

The citizens did not become direct shareholders of companies in the scheme but received vouchers (or certificates) which entitled them to one share in each of the 15 Funds, thus becoming indirect shareholders of privatised companies. The stated aim of the programme was for NIFs to restructure their portfolio companies, turn them into market oriented firms and sell them to either strategic owners or on the stock exchange. The Funds themselves were floated on the Warsaw Stock Exchange in June 1997 and the citizens' certificates had to be converted to Funds' shares by the end of 1998. Following a buoyant initial market, and the large-scale sale and purchase of shares, the role of the government began to decline and private owners began to dominate the NIFs. After the first general meetings of shareholders, members of the supervisory boards initially appointed by the government were replaced by members elected by new private shareholders. The direct role of the state in the funds came to an end. In columns (1), ( 2) and ( 3) the dependent variable is equal to one if in 2000 the firm has an owner with at least 50% of shares and zero otherwise. In columns ( 4), ( 5) and ( 6) the dependent variable is equal to one if the share of the largest owner has increased between 1995 and 2000 and zero otherwise. All independent variables, except dummies, are averaged over 1995-1999. The type of the largest owner refers to 2000. Standard errors are in parentheses; * significant at the 10 percent level; ** significant at the 5 percent level; and *** significant at the 1 percent level. All regressions include a constant term; the reference group for the 'type of the largest owner' is the combined category of State and National Investment Fund. See Table 4 for detailed definitions of variables. In columns (1) and ( 2) the dependent variable is equal to one if in 1999 the firm has an owner with at least 50% of shares and zero otherwise. In columns ( 3) and ( 4) the dependent variable is equal to one if the share of the largest owner has increased between 1996 and 1999. All independent variables, except dummies, are averaged over 1995-1999. The type of largest owner refers to 1999. Standard errors are in parentheses; * significant at the 10 percent level; ** significant at the 5 percent level; and *** significant at the 1 percent level. All regressions include a constant term; the reference group for the 'type of the largest owner' is 'State'. See Table 4 for detailed definitions of variables.

  shareholders. A couple of years later we can observe the emergence of individual entrepreneurs and industrial and commercial companies as the largest shareholders. All categories of largest owners have increased their equity stakes. Industrial and c ommercial companies and financial institutions have increased their average holding to over 56 percent while individuals and investment funds have increased their average holding to around 45-46 percent. formed 12 industrial sectors. The unusually rapid changes in ownership structure in firms included in the mass privatisation programmes in the Czech Republic and Poland give us the opportunity to empirically investigate the determinants of these changes. The owners' desire to change the initially imposed (Poland) or inefficient (the C zech Republic) ownership structure reflected, and certainly responded to, a variety of firm specific characteristics and factors representing the environment in which firms operate. In what follows we try to identify the determinants of the increase in ownership concentration in the group of Czech and Polish firms.

Table 1 : Average shareholdings of the largest owner in mass privatised firms (a) Czech Republic

 1

		1996	1997	1998	1999
	Mean	38.8	42.8	48.6	51.9
	Median	36.3	42.0	47.5	49.7
	Std. Dev.	19.3	20.4	21.5	21.8
	Number of firms	652	652	652	652
	(b) Poland
		1996	1997	1998	1999	2000
	Mean	33.9	36.7	42.1	47.7	50.3
	Median	33	33	33	33	33
	Std. Dev.	5.5	10.1	15.8	20.6	22.6
	Number of firms	441	440	439	439	439
	Source: Own calculation

Table 2 : Poland: The largest shareholder in mass privatized firms, 1998-2000

 2

	For each type of the largest shareholder the first row shows the number of firms, the second the
	average equity holdings and the third its standard deviation
		1998	1999	2000
	Foreign investor	33	44	52
	Average equity in percent	61.27	64.87	75.11
	Standard Deviation	27.40	26.61	22.14
	Domestic investors	406	395	387
	Average equity in percent	49.46	48.73	47.02
	Standard Deviation	21.95	21.53	20.5
	Of which:
	employees	9	13	13
	Average equity in percent	43.29	65.81	55.3
	Standard Deviation	16.01	22.16	17.36
	individual	15	29	39
	Average equity in percent	63.01	54.20	57.52
	Standard Deviation	17.61	23.80	21.89
	corporation	75	100	124
	Average equity in percent	58.09	56.07	61.25
	Standard Deviation	22.63	22.85	20.30
	National Investment Fund	298	243	199
	Average equity in percent	46.56	44.65	37.25
	Standard Deviation	21.28	19.29	12.38
	State	9	10	12
	Average equity in percent	57.00	36.29	18.7
	Standard Deviation	24.26	19.74	7.54
	Total	439	439	439

Table 3 : Czech Republic: the largest shareholder in mass privatised firms, 1996-1999

 3 For each type of the largest shareholder the first row shows the number of firms, the second the average equity holdings and the third its standard deviation

		1996	1997	1998	1999
	Individual	89	92	104	108
	Average equity in percent	35.12	36.40	39.39	44.77
	Standard Deviation	15.18	16.70	18.56	22.74
	Industrial or commercial company	295	371	372	404
	Average equity in percent	46.60	47.95	53.90	55.62
	Standard Deviation	19.15	20.48	21.05	20.93
	Investment fund	148	127	116	96
	Average equity in percent	27.97	32.73	42.03	46.27
	Standard Deviation	15.41	18.25	20.92	21.16
	Financial institution	58	33	41	27
	Average equity in percent	38.03	42.44	47.70	51.27
	Standard Deviation	18.51	17.16	20.16	22.61
	State	62	29	19	17
	Average equity in percent	33.05	40.64	37.07	42.99
	Standard Deviation	18.26	20.47	20.32	20.43
	Total	652	652	652	652
	Average equity in percent	38.75	42.75	48.59	51.94
	Standard Deviation	19.26	20.38	21.49	21.82

Table 4 : Definition of variables Variable Definition

 4 Dummies for different types of the largest shareholder in 1999 in the Czech Republic and in 2000 in Poland. In Poland we have foreign versus domestic investors, among which we distinguish between corporations, individuals, employees, the state and National Investment Funds. In the Czech Republic, there are five types of the largest owners: corporations, individuals, investment funds, financial institutions, and the state.

	Return on assets	Ratio of earnings before taxes and depreciation to total assets.
	Size	Natural logarithm of sales (in constant prices)
	Leverage	Ratio of total liabilities to total assets
	Investment	Ratio of net investment in fixed assets to total assets
	Type of the largest
	owner
	First wave of voucher	Dummy variable taking the value of 1 for companies included in
	privatisation in the	the first wave of voucher privatisation, and 0 otherwise
	Czech Republic
	Share of the largest	Logistic transformation of the percentage share of the largest
	owner in 1996	shareholder (C1) of a company: ln [C1/(100-C1)]
	National Investment	Dummies for each of the 15 lead NIFs
	Fund dummies
	Industry dummies	Dummies for industries to which firms belong. There are 12
		industries in the Czech Republic and 20 in Poland

Table 5 : Determinants of ownership concentration in Poland (probit regressions)

 5

Table 6 : Determinants of ownership concentration in the Czech Republic (probit regressions)

 6

We are grateful to Jean-Francois Nivet for helpful comments on an earlier version of this paper and to Erjon Luci and Bartlomiej Paczoski for invaluable help with the data.

Berglöf and Pajuste (2003) d ocument high ownership concentration in a number of transition economies.

Looking at cross-country variations, La[START_REF] Porta | Law and finance[END_REF] find that concentration of ownership (measured by the stake of the three largest shareholders) is negatively correlated with the quality of investors' legal protection. In other words ownership concentration becomes a substitute for legal protection of investors.

Looking at cross-country variations, La[START_REF] Porta | Law and finance[END_REF] find that concentration of ownership (measured by the stake of the three largest shareholders) is negatively correlated with the quality of investors' legal protection. In other words, ownership concentration becomes a substitute for legal protection of investors.

This ambiguity appears in the previous works. For instance,[START_REF] Demsetz | Ownership structure and corporate performance[END_REF] find that performance has a significant and negative effect on ownership concentration while in[START_REF] Jones | Choice of ownership structure and firm performance: Evidence from Estonia[END_REF] previous profitability does not affect ownership structure in a significant way.

[START_REF] Grosfeld | Competition and ownership structure: substitutes or complements? Evidence from the Warsaw Stock Exchange[END_REF] show that the performance of Polish listed firms improves when the largest owner has a majority stake in the company.

APPENDIX

Mass Privatisation in the Czech Republic

The main method of privatisation in the Czech Republic was 'voucher privatisation' through which some 1700 companies were privatised in two 'waves' in 1991-92 and 1992-94. 19 The shares of these companies were transferred to either individuals or privatisation investment funds (PIFs) in exchange for v ouchers. PIFs set up by manufacturing companies, private individuals and institutions as well as state-owned banks and insurance companies, actively participated in the process as financial intermediaries. Adult citizens received vouchers which they could exchange for the shares of companies in the scheme either directly or indirectly through privatisation investment funds. In the latter case, they could entrust their vouchers to investment funds and become shareholders of these funds (which were joint stock companies) or unit holders in unit trusts. The funds, in turn, could use vouchers collected from their members to bid for shares of their preferred companies. Understandably, given the prevailing information asymmetry and risk aversion, the majority of c itizens opted for the second alternative and entrusted their vouchers to investment funds. In the first wave, 72 percent of investment points available were used by funds and 28 percent by individuals directly. In the second wave, the percentages were 64 p ercent and 36 percent respectively. The bulk of investment points controlled by funds were concentrated in the hands of a small number of funds set up by banks and financial institutions (Hashi 1998). In the first wave, these funds were all close-end funds but in the second wave many of them took the form of unit trusts.

Later on, as part of the reform of the financial system, close-end funds were required to convert themselves to open funds by 2002. Initially, the funds were allowed to hold up to 20 percent of the shares of each company in the scheme, though they quickly found ways of bypassing this constraint. The funds' maximum holding in each company was later reduced to 11 percent.

The shares of mass privatised companies and privatisation investment funds were immediately listed on the stock market without the requirement of prior approval and the publication of a prospectus. The process of buying and selling of shares, and the