Yugoslavia - How redistribution hurts productivity in a socialist economy
Socialism as practiced in Eastern Europe is characterized by massive income redistribution. This paper focuses on: (a) interfirm redistribution, consisting of taxing profitable firms in order to subsidize unprofitable ones; and (b) intrafirm redistribution, consisting of the compression of personal income differentials within a firm. The author constructs a theoretical model of redistribution of income as practiced in Yugoslav firms. Empirical results lead to the conclusions that efficiency in production could be improved at no cost if such redistribution were abolished. Furthermore, economies in which much of the GNP is redistributed through bargaining are also bound to be inefficient in distribution because some groups are less able to represent their common interests than others. Contrary to a common belief, socialist countries can not be praised on the count of equity either. This paper presents the estimating framework and the results of the empirical analysis obtained on the basis of a sample of Slovenian enterprises and a brief discussion of policy implications concludes the paper.
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