Two essays on economic transition

Abstract

This dissertation consists of two essays on economic transition. The first essay studies the role of reform strategies in an economic reform. The second essay studies the impact of a country's constitutional arrangements on its economic reform. In the first essay, we present a transition model, in which the entry and production decisions of heterogeneous agents drive resources reallocation from the low-productivity sector to the high-talent sector. Entrepreneurs' entry and production decisions are constrained and affected by the reform strategy that is implemented. We compare three alternative reform strategies, the big-bang strategy, the privatization-only strategy, and the market-entry strategy. We have four findings in this essay. The first finding is that there is no low-talented firms exist in the steady state under any reform strategy. The second finding is an irrelevance result: the steady-state wage rate and steady-state capital-labor ratio depend only on exogenous variables in the model, such as the interest rate level and the credit market friction, and are independent of the exact reform strategy chosen. Our third finding is that, reform strategies affect the level of national incomes in the steady state. While the steady-state national incomes under the big-bang strategy is the same as under the market-entry strategy, the national income under the privatization-only strategy is higher. The reason is that under the latter strategy, there are legal constraints on who can start and run a business. This leads to larger and fewer firms, and correspondingly, fewer managers and a larger fraction of agents being employed as ordinary workers. Our fourth finding is that, because of fewer and larger firms, each manager's compensation and each entrepreneur's profits are greater under the privatization-only strategy than under the other two strategies. Thus, there are welfare and inequality implications between the reform strategies even in the long run. The second essay is an empirical study, in which we examine the relationship between the constitutional arrangements and the pace of economic reform from 1990 to 2010 in 28 post-Communist countries. We examine two constitutional arrangements, form of government and electoral rules. We also test the well-known status quo bias hypothesis concerning the economic reform. We have four findings in this chapter. The first finding is that, we do not verify the country's electoral rules or form of government have statistically significant impact on the country's economic reform. The second finding is that, we confirm the existence of the status quo bias in reform. The status quo bias is more prominent in the early stage of reform, while it is alleviated in the latter stage of reform. The third finding is that, we find that interest rate peak effectively reduces the reform momentum, while interest rate trough does not have statistically significant impact on reform. The fourth finding is that, we do not find that the business cycle has statistically significant impact on economic reform.