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"Dual track liberalization: with and without losers"

Jiahua Che and Giovanni Facchini


First Author :

Jiahua Che
University of Illinois
1206 S. Sixth Street, M/C 706
Champaign, IL 61820

(217) 333-4580

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Second Author :

Giovanni Facchini
University of Illinois
1206 S. Sixth Street, M/C 706
Champaign, IL 61820

(217) 265-0644

Abstract :
Dual track liberalization, relying upon the continued enforcement of existing contracts and the simultaneous creation of a free market sector, represents a powerful mechanism in economic reform. If not anticipated, the reform implements an outcome that is both Pareto improving and e±ciency enhancing as compared to the status quo. We show that when the reform is anticipated, intertemporal arbitrage arises potentially undermining these properties. Only when the original policy involves both price setting and quantity restrictions can anticipated dual track liberalization maintain its attractiveness. These conditions correspond well to the circumstances faced by transition economies.
JEL Classification : P2 , F1
Footnotes & Acknowledgements :
We would like to thank Dan Bernhardt, Hadi Esfahani, Earl Grinols, Eli Katz, Jan Svejnar, Bart Taub, Cecilia Testa, Thierry Verdier, Wei Yin Zhang, Li An Zhou and seminar participants at the ERWIT CEPR meeting in Bern, the Midwest International Economics Meetings in Pittsburgh, SAET VI conference in Rhodes, Beijing University, the University of Illinois and University of Leipzig for useful comments.
Manuscript Received : 2004
Manuscript Published : January 21, 2004
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