The Design of Reform Packages Under Uncertainty
Paper presented at the International Conference on The Theory of Firm and China's Economic Reform, Beijing 1996
Posted: 2 May 1997
Date Written: Undated
We present a model of large-scale economic reforms, modeled on the transition process in Eastern Europe, with aggregate and individual uncertainty concerning the outcome of reforms. The government is assumed to choose the speed and sequencing of reforms. We compare big-bang strategies with gradualist reform packages. We show that (i) gradualist reform packages may be easier to get started, (ii) optimal sequencing of reforms should aim at creating constituencies for further reforms, and (iii) gradualism may generate a higher investment response because of a lower option value of waiting than a big-bang approach would have.
JEL Classification: P21
Suggested Citation: Suggested Citation