A Tale of Two Reforms

I identify the absence of well-functioning product markets in transition economies as a sufficient condition under which big bang reduces output initially, while a Chinese-style reform increases output. Big bang disman-tles central planning or centralized organization of production, permitting monopolistic and vertically interdependent enterprises to pursue their own monopoly profits by restricting output and inter-firm trade to the detriment of the economy as a whole. The Chinese reform, by maintaining central plan-ning but allowing enterprises to produce for the emerging product markets after they have fulfilled their output quotas under planning, gives enterprises incentives to expand output beyond planned targets.