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Discussion Paper Details

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Title: The Virtues of Gradualism and Legitimacy in the Transition to a Market Economy

Author(s): Mathias Dewatripont and G�rard Roland

Publication Date: April 1991

Keyword(s): Political Constraints, Sectoral Restructuring and Transition

Programme Area(s): Applied Macroeconomics

Abstract: This paper presents a simplified model of sectoral restructuring in Eastern Europe. A move towards allocative efficiency is desired by the reform-minded government, but the shift to higher productivity which such efficiency requires would lead to massive layoffs and labour reallocation in the transition period. We look at the impact of political constraints (unanimity and/or majority worker approval) on reform proposals when the government faces a heterogeneous workforce, holding private information on relative outside opportunities. When the budgetary consequences of exit compensations are so important as to make partial reforms preferable to full reforms, gradualism emerges as the optimum in a dynamic context without government commitment. It is also shown that under democratic majority rule, a government in control of the agenda of reforms can win majority approval for plans which end up hurting majority interests intertemporally by threatening to switch majorities in future reform proposals.

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Bibliographic Reference

Dewatripont, M and Roland, G. 1991. 'The Virtues of Gradualism and Legitimacy in the Transition to a Market Economy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=538