Price Liberalization and Output Decline in Transition

Arbeitspapier

In this paper, we attempt to fill the gap in theoretical explanations of a large output decline that took place in the early years of transition process. The prevalent explanations, commonly found under the title of disorganisation, are succesful in explaining output decline in countries of firmer Soviet Union, but less so for Central and Eastern European countries. The model we develop shares the cause of output decline with disorganisation - price liberalisation, however, the decline takes place only under a set of plausible assumptions: adjustment costs to labor mobility across economic sectors and large benefits to inactivity in a firm of either government transfers or reservation wage earned in infirmal economy. Liberalisation of prices in a firm of removal of distortionary taxes creates incentives for labor mobility from a declining sector to inactivity. The decline takes place only in a part of the economy, while the rest of the economy stagnates or slowly grows. Since the model does not have a closed-firm solution, we analyze the equilibrium allocation using simulation methods. We also discuss the political economy of refirms and identify the conditions under which rational voters under majoritarian voting rule would support the price liberalisation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: LICOS Discussion Paper ; No. 153

Classification and Topics

• Classification: Wirtschaft ; Neoclassical Models of Trade ; Labor Force and Employment, Size, and Structure ; Mobility, Unemployment, Vacancies, and Immigrant Workers: General ; Macroeconomic Analyses of Economic Development ; Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
• Subject: liberalization ; transition ; recession ; adjustment cost ; government transfers ; reservation wage ; heterogeneity ; Staatliche Preispolitik ; Deregulierung ; Gesamtwirtschaftliche Produktion ; Übergangswirtschaft ; Anpassungskosten ; Osteuropa

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Polanec, Sašo
• Event: Veröffentlichung
• (who): Katholieke Universiteit Leuven, LICOS Centre for Transition Economics
• (where): Leuven
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/74990
• Last update: 10.03.2025, 11:43 AM CET