Pervasive Shortages Under Socialism

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We present a new theory of pervasive shortages under socialism, based on the assumption that the planners are self-interested. Because the planners -- meaning bureaucrats in the ministries and managers of firms -- cannot keep the official profits that firms earn, it is in their interest to create shortages of output and to collect bribes from the rationed consumers. Unlike official profits, bribes are not turned over to the state, and so shortages enable the key decision makers who collect them to profit personally. The theory suggests that an increase in the official price of a good might reduce output. The theory also suggests that market socialism is bound to fail even without computational complexities facing the planners.

Published: RAND Journal of Economics, 1992, vol. 23, issue 2, pages 237-246

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