Resource Allocation During the Transition to a Market Economy: Political Implications of Supply Bottlenecks and Adjustment Costs
This paper explains why a laissez-faire approach may fail to account for externalities in transforming economies, focusing on externalities associated with supply bottlenecks and adjustment costs. Bottlenecks tend to arise whenever input requirements are stochastic and the opportunity cost of holding inventories is high. They are likely to become prevalent in the state industrial sector once budget constraints are hardened and credit markets begin to function properly, since the creditworthiness of state enterprises is limited by outdated production technologies. The analysis recognizes that producers have incentives to form pooling arrangements, supported potentially by market mechanisms, for reallocating stocks of critical inputs. It is shown, however, that such arrangements do not eliminate the externalities, and that the externalities rise in a nonlinear manner with the opportunity cost of holding inventories. The analysis suggests that once budget constraints are hardened, the externalities associated with bottlenecks and adjustment costs provide a case for subsidizing the costs of critical inputs for the state industrial sector, but not for the new private sector. This subsidy declines as the private sectors grows.
|Date of creation:||May 1993|
|Date of revision:|
|Publication status:||published as The Economics of Transition, "Production Bottlenecks and Resource Allocation During the Transition to a Market Economy," Vol 3(3), pp. 321-331, 1995.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1992. "The Transition to a Market Economy: Pitfalls of Partial Reform," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 889-906.
- Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
- Perotti, Enrico C., 1993. "Bank lending in transition economies," Journal of Banking & Finance, Elsevier, vol. 17(5), pages 1021-1032, September.
- Michael Bruno, 1992. "Stabilization and Reform in Eastern Europe; A Preliminary Evaluation," IMF Working Papers 92/30, International Monetary Fund.
- Dani Rodrik, 1992.
"Making Sense of the Soviet Trade Shock in Eastern Europe: A Framework and Some Estimates,"
NBER Working Papers
4112, National Bureau of Economic Research, Inc.
- Rodrik, Dani, 1992. "Making Sense of the Soviet Trade Shock in Eastern Europe: A Framework and Some Estimates," CEPR Discussion Papers 705, C.E.P.R. Discussion Papers.
- Stanley Fischer, 1992. "Stabilization and Economic Reform in Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 77-126.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4366. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.