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Putty-clay politics in transition economies

  • Lyons, Robert F.
  • Rausser, Gordon C.
  • Simon, Leo K.

We build a bargaining-theoretic model of an important dilemma inherent in any major political economic transition process. While swiftly removing the old order is a necessary condition for a successful transition, it also leads to widespread social disruption that may threaten the viability of the reform process. This issue lies at the heart of much of the "big-bang/gradualism" debate in the literature. We argue that this dichotomy is overly simplistic. In particular, the debate, as it has been framed, has failed to capture the significance of interest group competition. Interest group competition matters precisely because the political environment during a transition is fluid and malleable and is thus open to manipulation by interests seeking to mold post-transition governance structures to best serve themselves. As different economic and political structures will give rise to different incentives within these interest groups, one might expect that transition strategies will differ across societies. We show this is the case with two interesting examples. First, we consider how transition strategies differ in open and closed economies. We are able to derive a number of strong results, the most striking of which identifies conditions under which closed economies outperform open economies in terms of social welfare. Our second set of experiments examines Krueger's (1993) "vicious and virtuous circles" theory of policy reform. We identify conditions under which societies with political systems that reward rent-seeking behavior enjoy higher social welfare than societies with political systems that reward productive behavior.

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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt0t30p88v.

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Date of creation: 01 May 1996
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Handle: RePEc:cdl:agrebk:qt0t30p88v
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  1. Lyons, Robert F. & Rausser, Gordon C. & Simon, Leo K., 1994. "Disruption and continuity in Bulgaria's agrarian reform," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt20n2p0ns, Department of Agricultural & Resource Economics, UC Berkeley.
  2. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  3. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  4. Dewatripont, Mathias & Roland, Gerard, 1995. "The Design of Reform Packages under Uncertainty," American Economic Review, American Economic Association, vol. 85(5), pages 1207-23, December.
  5. Woo, W.T., 1993. "The Art of Reforming Centrally-Planned Economies: Comparing China, Poland and Russia," Papers 93-09, California Davis - Institute of Governmental Affairs.
  6. Rausser, Gordon C & Freebairn, John W, 1974. "Estimation of Policy Preference Functions: An Application to U.S. Beef Import Quotas," The Review of Economics and Statistics, MIT Press, vol. 56(4), pages 437-49, November.
  7. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1992. "The Transition to a Market Economy: Pitfalls of Partial Reform," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 889-906, August.
  8. Zusman, Pinhas, 1976. "The Incorporation and Measurement of Social Power in Economic Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 447-62, June.
  9. Sachs, J.D. & Woo, W.T., 1994. "Structural Factors in the Economic Reforms of China, Eastern Europe and the Former Soviet Union," Papers 94-01, California Davis - Institute of Governmental Affairs.
  10. Rausser, Gordon C. & Simon, L., 1992. "The Political Economy of Alliances: Structure and Performance," Staff General Research Papers 712, Iowa State University, Department of Economics.
  11. Vicente Galbis, 1994. "Sequencing of Financial Sector Reforms: A Review," IMF Working Papers 94/101, International Monetary Fund.
  12. Baron, David P & Ferejohn, John, 1987. "Bargaining and Agenda Formation in Legislatures," American Economic Review, American Economic Association, vol. 77(2), pages 303-09, May.
  13. Newbery, David M., 1993. "Transformation in mature versus emerging economies: Why has Hungary been less successful than China?," China Economic Review, Elsevier, vol. 4(2), pages 89-116.
  14. Gordon C. Rausser & Leo K. Simon, 1992. "Political Economy of Alliances: Structure and Performance, The," Center for Agricultural and Rural Development (CARD) Publications 92-gatt10, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  15. Paul G. Hare, 1991. "Hungary: In Transition to a Market Economy," Journal of Economic Perspectives, American Economic Association, vol. 5(4), pages 195-201, Fall.
  16. Roland, Gérard, 1994. "The Role of Political Constraints in Transition Strategies," CEPR Discussion Papers 943, C.E.P.R. Discussion Papers.
  17. Rausser, Gordon C. & Simon, Leo K. & Veld, Klaas T. van't, 1995. "Political Economic Processes and Collective Decision Making," 1994 Conference, August 22-29, 1994, Harare, Zimbabwe 183389, International Association of Agricultural Economists.
  18. Krueger, Anne O, 1993. "Virtuous and Vicious Circles in Economic Development," American Economic Review, American Economic Association, vol. 83(2), pages 351-55, May.
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