Price adjustment under the table Evidence on efficiency.pdfVIP

European Journal of Political Economy 23 (2007) 423 – 447 /locate/ejpe Price adjustment under the table: Evidence on efficiency-enhancing corruption Daniel Levy ⁎ Department of Economics, Bar-Ilan University, Ramat-Gan 52900, Israel Received 3 July 2006; received in revised form 16 January 2007; accepted 16 January 2007 Available online 9 March 2007 Abstract Based on first-hand account, this paper offers evidence on price setting and price adjustment mechanisms that were illegally employed under the Soviet planning and rationing regime. The evidence is anecdotal, and is based on personal experience during the years 1960–1971 in the Republic of Georgia. The description of the social organization of the black markets and other illegal economic activities that I offer depicts the creative and sophisticated ways that were used to confront the shortages created by the inefficient centrally-planned command economic price system with its distorted relative prices. The evidence offers a glimpse of quite explicit micro-level evidence on various types of behavior and corruption that were common in Georgia. Rent-seeking behavior, however, led to emergence of remarkably well-functioning and efficiency-enhancing black markets. The evidence, thus, underscores once again the role of incentives in a rent-seeking society. © 2007 Elsevier B.V. All rights reserved. JEL classification: B14; D30; D73; E12; E31; E64; H26; H40; K42; L16; O17; P20; P26; Z13 Keywords: Corruption; Black market; Bribe; Price system; Distorted relative prices; USSR; Command economy; Price adjustment; Cost of price adjustment; Menu cost 1. Introduction “Science requires more resources of the language