Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/74990
Authors: 
Polanec, Sašo
Year of Publication: 
2004
Series/Report no.: 
LICOS Discussion Paper 153
Abstract: 
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.
Subjects: 
liberalization
transition
recession
adjustment cost
government transfers
reservation wage
heterogeneity
JEL: 
F11
J21
J60
O11
O17
Document Type: 
Working Paper

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