Public Governance as the Source of Quality and Variety Gains from Transition

Two economies, a centrally planned economy (CPE) and a post-transition regulated mixed market economy (RMME), are modeled in a static general equilibrium setting that allows for trade-offs among the quantity, quality and variety of production. Equilibrium in these economies is determined by the quality of public governance. In real world transitions from a CPE to a RMME, quality improvements and an increasing variety of production matter more than output volumes. Our model indicates that improvements in public governance, connected with a successful political transformation, facilitate such changes. This result is compatible with the view that the post-transition output path can be accounted for by observable initial conditions and liberalization policies. However, both are completely determined by the quality of governance in the pre-transition and post-transition states