In this paper, we investigate the extent and likely impact of employee ownership on the transition process under way in Central and Eastern Europe. Despite the fact that political realities in most of the region imply that sales or transfers to employees often represent a significant privatization path, much of the literature on economic reform has been critical of the potential role of employee ownership in enterprise restructuring (for example, Blanchard et al., 1991), although the ownership form also has a few proponents (for instance, Ellerman, 1990). The relative merits and differences in behavior of employee-owned firms compared with "conventional" capitalist firms in market economies have received considerable attention in the Western literature (for example, Bonin and Putterman, 1987; Bonin, Jones, and Putterman, 1992; Hansmann, 1990; Pencavel and Craig, 1994). What is not yet well understood is the particular strengths and deficiencies brought by employee ownership to the process of transition itself. Our attempts to answer this question provide the conceptual framework in this paper against which actual privatization programs in various countries are evaluated and against which hypotheses about relative performance may derived and tested.