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

Peter Isard and Joshua Aizenman

No 1993/006, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; resource allocation; production bottleneck; representative firm; production stoppage; production environment; production sector; enterprise reform; Public sector; Industrial sector; Credit; Employment; Eastern Europe (search for similar items in EconPapers)
Pages: 41
Date: 1993-02-01
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1993/006

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