Privatization, Market Liberalization and Learning in Transition Economies
Working Paper no. 788
Posted: 5 Sep 1997
Date Written: May 1996
Privatization and market liberalization are widely considered to be complementary reforms in transition economies. This paper challenges this view and the closely related "big bang" approach to economic reform. Our analysis suggests that when pursued simultaneously, privatization may actually impede the transition process following market liberalization and reduce social welfare. Our result is based on an explicit model of market learning, which is a vital component of the economic transition process. Compared to a fully-functioning market in a mature market economy, a market in transition is characterized by greater uncertainty regarding market conditions, including free market equilibrium levels of prices and quantities. Market participants must learn about these conditions through their participation in the market process. When the e ects of learning are incorporated into the analysis, the optimal level of privatization decreases monotonically as the level of uncertainty increases.
JEL Classification: L33, P42,P51
Suggested Citation: Suggested Citation