Changing economic mechanisms: A model of the transition from budget regulation to the competitive market (*)

Vadim Arkin and Alexander Slastnikov ()

Economic Theory, 1996, vol. 7, issue 2, 307-321

Abstract: In the framework of dynamic equilibrium theory we propose a model of gradual transition from an Economy with centralized budgets regulation to a Market Economy (with self-financing). It is assumed that information about possible change of the economic mechanism affects essentially the behavior of agents. The duration of the transition period is regarded as a random variable. We study conditions when such a transition allows firms to adapt their plans to future markets and guarantees the existence of equilibrium paths. We also discuss the case of Shock Therapy (instantaneous transition) which may cause bankruptcy, jumps in prices and deficits.

Date: 1996
Note: Received: May 12, 1994; revised version November 4, 1994
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