Price Liberation And Local Resistance: A Theory For Economies In Transition

This paper models the incentives of local governments in formally centrally planned economies to resist a price liberalization in the consumer market. It is argued that many of these governments have a consumption bias and are willing to forego a unit of local state enterprise profit to in order to increase consumer welfare. The existence of a consumption bias explains why a local government would continue to hold down state sector prices when private capacity holdings are sufficiently low. It also predicts that once private capacity holdings reach a sufficiently large level, a local government would both increase consumer welfare and local budgetary revenues by supporting a price liberalization.