Three essays on the political economy of reform

The purpose of this thesis is to investigate the transition toward a market economy from a political economy perspective. The goal is to trace the link between the polity-formation process and successful economic reform by identifying the factors that favour or hinder the adjustment efforts. The first essay, entitled “Determinants of Success in Transition”, accounts for the dissimilar economic trajectories of transition countries. The aim is to show why the ability to implement reforms is different across countries. A bargaining framework is used to model the political sector. The key endogenous variables are the size of the asset transfer to the private sector and the magnitude of the compensation payments. The main exogenous variables are the relative bargaining power, the magnitude of the threat points, and the transaction costs of providing compensation. The most important theoretical result shows that the higher the opposition’s threat point and bargaining power, the larger the asset transfer. The second essay, entitled “Initial Conditions and Economic Reform”, is an empirical study exploring the impact of a comprehensive set of factors on the ability to initiate and implement economic reforms by countries in transition. The variables measuring these factors belong to three groups, characterizing the macroeconomic and structural distortions inherited at the start of transition, the competitiveness of the political markets at the polity-defining stage, and the elements affecting the ability to solve coordination and collective action problems. While the regression analysis finds that variables from all groups influence capacity for reform, the factors characterizing the behaviour of the political market at the onset of transition played a central role. The third essay, entitled “Transaction Costs, Strategic Interaction, and Farm Restructuring”, offers a transaction cost explanation for the different paths of organizational adjustment in the case of the former state and collective farms in Czech Republic. The focus is on the strategic interaction among the stakeholders in large-scale agricultural organizations. In the presence of a neutral institutional environment, the number of players involved in the intra-organizational process, their ability to make collective decisions, and their perceived payoffs in alternative farming structures determine the restructuring outcome.