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Public Finance and the Optimal Speed of Transition

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  • Castanheira, Micael

Abstract

We develop a general equilibrium model that jointly considers the influence of capital accumulation constraints and of labour market frictions on the process of transition. We endogenize the economic and budgetary costs of different government policies and show that, early in transition, governments ought to subsidize state firms. Provided that inter-temporal commitment is feasible, this policy limits the initial output fall, which relaxes capital accumulation constraints, accelerates transition, and increases welfare. Moreover, by resorting to indirect — instead of direct — taxes, governments can bring the path of transition closer to the first best. Yet, political pressures may induce a policy of excessive subsidization.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3797.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3797

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Keywords: subsidies; transition;

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Cited by:
  1. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan.
  2. Olivier Blanchard & Michael Kremer, 1997. "Disorganization," William Davidson Institute Working Papers Series 38, William Davidson Institute at the University of Michigan.
  3. Balla, Katalin & Köllo, János & Simonovits, András, 2008. "Transition with heterogeneous labor," Structural Change and Economic Dynamics, Elsevier, vol. 19(3), pages 203-220, September.

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