The optimal speed of transition: A general equilibrium analysis

We present a benchmark model for the optimal speed of transition from a sta te-owned to a private market economy, based on the consumption-savings deci sion in a closed economy. We abstract from frictions to focus on the macroe conomic conditions for accumulation of private capital and closure or restr ucturing of state-owned enterprises. It is shown that hard budget constrain ts compensate for too slow speed of enterprise closure but that an excess s peed of closure may slow down transition because of output contraction effe cts. This will especially be the case if such a deviation occurs at early s tages of transition.