Moving Toward the Rule of Law in the Face of Corruption: Re-Examining the Big-Bang

Abstract

We investigate the claim that the establishment of property rights in an economy in transition would create its own demand for the enforcement of laws to protect those rights. Our model contains a government seeking activities to accomplish certain objectives that depend on public support for the enforcement of the rule of law. It also contains agents who interpret the activitiesof the government as signals as to the intent of the government to enforce the rule of law. The agents use the signals in their choice of whether to support the objectives of the government. With both the government and the agents playing an active role, we establish conditions under which the activities chosen by the government will maximize its benefits and, at the same time, maximize the constituency in support of enforcement. These conditions provide a basis for the argumentfor the implementation of the big-bang policy in economies in transition. However, when these conditions do not hold, we show that in pursuing its own goals, the government reduces support for the enforcement of the rule of law, which, in our model, leads to an increase in corruption. Two characteristics play an important role in these conditions: the initial level of corruption in the economy and the types of activities the government chooses to undertake. We present four examples to determine the relative importance to our conclusions of each of these characteristics.

Keywords: Rule of law, corruption, big-bang, shock therapy, gradualism, transition