Resource Allocation During the Transition to a Market Economy: Policy Implications of Supply Bottlenecks and Adjustment Costs
February 1, 1993
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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.
Subject: Credit, Economic sectors, Employment, Industrial sector, Labor, Money, Public sector
Keywords: Credit, Eastern Europe, Employment, enterprise reform, Industrial sector, production bottleneck, production environment, production sector, production stoppage, Public sector, representative firm, resource allocation, WP
Pages:
41
Volume:
1993
DOI:
Issue:
006
Series:
Working Paper No. 1993/006
Stock No:
WPIEA0061993
ISBN:
9781451842241
ISSN:
1018-5941
