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Resource Allocation During the Transition to a Market Economy: Policy Implications of Supply Bottlenecks and Adjustment Costs

Author

Listed:
  • Mr. Peter Isard
  • Mr. Joshua Aizenman

Abstract

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.

Suggested Citation

  • Mr. Peter Isard & Mr. Joshua Aizenman, 1993. "Resource Allocation During the Transition to a Market Economy: Policy Implications of Supply Bottlenecks and Adjustment Costs," IMF Working Papers 1993/006, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1993/006
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    Cited by:

    1. Joshua Aizenman & Peter Isard, 1995. "Production bottlenecks and resource allocation during the transition to a market economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(3), pages 321-331, September.
    2. Aizenman, Joshua & Isard, Peter, 1996. "Production bottlenecks and congestion externalities during the transition to a market economy," International Review of Economics & Finance, Elsevier, vol. 5(3), pages 225-241.

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