PRIVATIZATION, MARKET LIBERALIZATION, AND LEARNING IN TRANSITION ECONOMIES

Privatization and market liberalization are widely considered to be co mplementary reforms in transition economies. This article challenges t his view and the closely related ''big bang'' approach: when pursued t oo vigorously, privatization may impede the transition process followi ng liberalization. Our result is based on an explicit model of market learning. Compared to a mature market, a market in transition is chara cterized by greater uncertainty regarding market conditions, including equilibrium prices and quantities. Economic actors must learn about t hese conditions through their participation in the market process. Les s than full privatization is optimal if the costs of learning are suff iciently important.