Modeling Institutions, Start-Ups and Productivity During Transition
International Monetary Fund (IMF) - European Department
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
February 9, 2010
William Davidson Institute Working Paper No. 975
The transition paths from plan to market have varied markedly across countries. Central and Eastern European and the Baltic countries, which opted for a fast and profound transformation of their institutions including business climates, rapidly narrowed the productivity gap with advanced economies. In contrast, in countries of the Commonwealth of independent States, which embarked on reforms later and contented with less depth, the productivity gap remains substantial. While the literature has focused mainly on empirical studies, this paper develops a dynamic search model of the firm start-ups that is consistent with the above trends. The model shows that an enabling institutional set up stimulates start-ups of highly productive firms at an earlier stage of transition, underscoring the importance of reforms. The role of the state sector as an employer during transition rises in countries where reforming institutions is particularly costly.
Number of Pages in PDF File: 25
Keywords: Start-ups, dynamic search model, business climate, productivity, transition
JEL Classification: C61, C63, O14, O57working papers series
Date posted: March 11, 2010
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