After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies

• Published in: The American economic review Vol. 94; no. 3; pp. 753 - 763
• Main Authors: Hoff, Karla, Stiglitz, Joseph E.
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01.06.2004
• Subjects: Asset stripping; Business structures; Economic models; Economic reform; Economic theory; Economic transitions; Economic value; Game theory; Gross domestic product; Law; Law enforcement; Legal systems; Natural resources; Political economy; Post-communist societies; Privatization; Property rights; Regime transition; Rule of law; Shorter Papers; Studies; Transition economies; Transitional economies; World Bank; Russia
• ISSN: 0002-8282; 1944-7981
• DOI: 10.1257/0002828041464533

In recent years economists have increasingly been concerned with understanding the creation of the rules of the game - in the broad sense of political economy - rather than merely the behaviors of agents within a set of rules already in place. The strategy adopted in Russia and many other transition economies was the Big Bank - mass privatization of state enterprises as quickly as possible. But there was no theory to explain how this process of institutional evolution would occur and, in fact, it has not yet occurred in Russian and in many of the other transition economies. What explains the gap between what emerged in the 1990s and what the reformers hoped would emerge? This paper provides an explanation based on a simple model in which the economic actions and the political positions of individuals are interdependent. This interdependence is examined within a highly stylized general-equilibrium framework under conditions that can be interpreted as very favorable to the emergence of the rule of law.