Resource Allocation During the Transition to a Market Economy: Policy Implications of Supply Bottlenecks and Adjustment Costs

Author/Editor:

Peter Isard ; Joshua Aizenman

Publication Date:

February 1, 1993

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper discusses the case against a laissez faire approach to resource allocation and develops a model of supply bottlenecks. It argues that: (1) once budget constraints are hardened and credit markets begin to function appropriately, externalities associated with production bottlenecks and adjustment costs--other considerations aside--provide a case for subsidizing the costs of critical inputs for the state sector but not the new private sector; (2) the optimal subsidy declines as the private sector grows; and (3) the subsidy should be “financed” by taxing wage income in the state sector, which will strengthen incentives for workers to move.

Series:

Working Paper No. 1993/006

Subject:

Credit Economic sectors Employment Industrial sector Labor Money Public sector

English

Publication Date:

February 1, 1993

ISBN/ISSN:

9781451842241/1018-5941

Stock No:

WPIEA0061993

Pages:

41

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