A MODEL OF THE SOCIALIST FIRM IN TRANSITION TO A MARKET-ECONOMY

This paper models the dynamic adjustment path of a socialist firm in transition to a market economy by a price shock that renders old capital obsolete. The firm can adjust with investment in more productive capital equipments. The optimal time paths of investment, output, and employment are analyzed and the impact of fiscal incentives like investment subsidies and a reduced corporate income tax rate are studied. Like output, the aggregate capital stock follows a J-curve. The conditions for viability of firms and the impact of variables such as wage increases on the value of the firm are discussed.