Working Paper: CEPR ID: DP538
Authors: Mathias Dewatripont; Gerard Roland
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.
Keywords: transition; sectoral restructuring; political constraints
JEL Codes: 020; 610
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political constraints (D72) | implementation of full reforms (E69) |
| political constraints (D72) | suboptimal reform outcomes (H21) |
| gradualism (O40) | budgetary impact (H61) |
| government proposals (H81) | worker preferences (J29) |
| government control of reform agenda (P41) | majority approval processes (D72) |
| government manipulation of majority approval (D72) | reforms harming majority interests (P26) |
| worker exit incentives (J65) | allocative efficiency (D61) |