Optimal Technological Choices After a Structural Break: The Case of the Former Communist Economies

Abstract

This article analyzes the transition observed after the fall of communism in Eastern Europe and the former Soviet Union. It uses a general equilibrium model whereby skill bias in production technology is optimally chosen. As observed in the data, the model produces significant temporary losses in output and physical capital, together with increases in the skill premium, suggesting that part of the transition could be explained by a costly process of adjustment to new technologies.

Keywords:

• Endogenous skill-biased technical change
• transition economies

JEL Classification:

• E25
• J24
• O33
• O57
• P27

Notes

1. The effects of the brain drain were shown by Suzuki (2018) for the case of Serbia.

2. It is not the objective of the article to explain fully all the features of the data; instead, a simple model can rationalize some of the features observed in these economies.

3. See the Appendix for a description of the decentralized equilibrium.

4. Alternatively, the regime change can be interpreted as a change in the technology change parameter $\zeta$ from $\mathrm{\infty }$ to some finite value.

5. This is not a key issue. Households could buy $H()$ in the market; since it is a constant return to scale technology the results would not change.