When does rent-seeking augment the benefits of price and trade reform on rationed commodities? : estimates for automobiles and color televisions in Poland
To assess the impact of price and trade reform on the Polish market for autos and color televisions, the author has developed a differentiated product model in which consumers maximize utility and firms maximize profits subject to rationing constraints and price controls. This paper focuses on that model. First it discusses the institutional details of the auto and color TV markets in Poland. It then lays out the stylized facts that are incorporated in the model, and discusses the methods of allocating autos and color TVs in the context of the rent-seeking and rent dissipation literature. The final section summarizes the results which find that, all things being equal, the elimination of price controls for both autos and televisions had the effect of decreasing imports, as more domestic autos were produced and sold. The implication is that -- contrary to the Polish government's intention -- price controls were a trade distortion that increased imports: that is, they implicitly subsidized imports. The author also shows that import liberalization produces greater benefits when there are domestic price controls with rent dissipation, because import liberalization reduces the rent. The appendices include a description of the model, a discussion of the data sources, and a review of the literature on rent-seeking activities as it relates to rent dissipation under price controls.
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