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Changing economic mechanisms: A model of the transition from budget regulation to the competitive market (*)

Author

Listed:
  • Vadim I. Arkin

    (Central Economic and Mathematical Institute, Russian Academy of Science, Krasikova 32, 117418 Moscow, RUSSIA)

  • Alexander D. Slastnikov

    (Central Economic and Mathematical Institute, Russian Academy of Science, Krasikova 32, 117418 Moscow, RUSSIA)

Abstract

In the framework of dynamic equilibrium theory we propose a model of gradual transition from an Economy with centralized budgets regulation to a Market Economy (with self-financing). It is assumed that information about possible change of the economic mechanism affects essentially the behavior of agents. The duration of the transition period is regarded as a random variable. We study conditions when such a transition allows firms to adapt their plans to future markets and guarantees the existence of equilibrium paths. We also discuss the case of Shock Therapy (instantaneous transition) which may cause bankruptcy, jumps in prices and deficits.

Suggested Citation

  • Vadim I. Arkin & Alexander D. Slastnikov, 1996. "Changing economic mechanisms: A model of the transition from budget regulation to the competitive market (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 307-321.
    • Handle: RePEc:spr:joecth:v:7:y:1996:i:2:p:307-321
    Note: Received: May 12, 1994; revised version November 4, 1994
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