Economics of Transition · 1999 · 256 citations · 0 references
Social SciencesBusiness EconomicsEconomicsMacroeconomicsMicroeconomicsProduction EconomicsCapital MarketsEconomic RestructuringFactor SubstitutionGrowth TheoryInvestmentCapital Asset DepreciationDepreciation Of Natural CapitalEconomic Growth DynamicsEconomies With ProductionMarket TransitionPhysical DepreciationPrice Liberalization
The paper introduces a model explaining why price liberalization in Central and Eastern European transition economies is linked to a significant output decline. The model incorporates search frictions and Williamsonian relation‑specific investment, so new investments occur only after firms secure a new long‑term partner. The analysis shows that when all firms seek new partners, output can fall due to disruption of existing production links, reduced investment, and capital depreciation, but gradual liberalization such as China’s dual‑track system can avert this transitory decline. JEL classification: D21, D50, E30, E61, P41, P51.
We present a model to explain why in the transition economies of Central andEastern Europe an important output fall has been associated with price liberalization. Its key ingredients are search frictions and Williamsonian relation‐specific investment, implying that new investments are made only after having found a new long‐term partner. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links, b) a fall in investment, and c) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese ‘dual‐track’ price liberalization may avoid the transitory output fall. JEL classification: D21, D50, E30, E61, P41, P51.