Abstract
We analyze the macroeconomic consequences of rent-seeking activities in transition economies. Due to strategic complementarities in modernization of firms, multiple equilibria can occur. However, given the institutional vacuum, the macroeconomic outcomes crucially depend on how property rights are distributed and on the number of contestants over the surplus of the firms. Under inside ownership, the distributional conflict between inside workers, within each firm, may lead to a bad equilibrium without modernization. Outside ownership adds another level of distributional conflict (between insiders and outsiders) but may lead to a high equilibrium with modernization as the number of outside owners increases.
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