Pervasive Shortages under Socialism

We present a new theory of pervasive shortages under socialism, based on the assumption that the planners are self-interested. Because the planners -- meaning bureaucrats in the ministries and managers of firms -- cannot keep the official profits that firms earn, it is in their interest to create shortages of output and to collect bribes from consumers. The theory implies that (1) an increase in the official price of a good might reduce output, (2) market socialism is bound to fail even without computational complexities facing the planners, and (3) price liberalization will succeed only if firms get to keep their profits.