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Revisiting the Invisible Hand Hypothesis: A Comparative Study between Bulgaria and Germany

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  • Vasilev, Aleksandar
  • Gesheva, Nadezhda

Abstract

This paper examines Adam Smith’s concept of an Invisible Hand of the market in light of the underlying assumptions for the theory to hold. Furthermore, the study focuses on Total Factor Productivity as a measure of efficiency of resource allocation, employs growth accounting in Bulgaria relative to a frontier country (Germany), and tries to explain the Total Factor Productivity gap with the difference in the quality of institutions and economic freedom performance (where the latter is based on the Freedom Index Indicators). Satisfactory results have been obtained, favoring the hypothesis that freer markets perform better and a “catching up” effect of Bulgaria’s Total Factor Productivity levels towards those of Germany has been observed. Finally, the study provides policy recommendations facilitating the Invisible Hand Process in Bulgaria for a more rapid convergence towards Germany’s productivity levels.

Suggested Citation

  • Vasilev, Aleksandar & Gesheva, Nadezhda, 2017. "Revisiting the Invisible Hand Hypothesis: A Comparative Study between Bulgaria and Germany," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 8(1), pages 45-77.
    • Handle: RePEc:zbw:espost:161620
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    References listed on IDEAS

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    1. Vasilev, Aleksandar, 2015. "Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria's 2008 flat tax reform," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 48(2), pages 169-185.
    2. Vasilev, Aleksandar, 2015. "The welfare effect of flat income tax reform: the case of Bulgaria," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 205-220.
    3. Vasilev, Aleksandar, 2013. "Technical Appendix to "Macroeconomic effects of public sector unions"," MPRA Paper 68235, University Library of Munich, Germany, revised Dec 2015.
    4. Teodor Sedlarski, 2009. "Transaction Costs in the Course of the System Transformation in Bulgaria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 35-55.
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    11. repec:pri:cepsud:178lee is not listed on IDEAS
    12. Aleksandar Vasilev, 2015. "Macroeconomic Effects of Public-Sector Unions," LABOUR, CEIS, vol. 29(2), pages 101-126, June.
    13. Adriana Liberto & Stefano Usai, 2013. "TFP Convergence Across European Regions: A Comparative Spatial Dynamics Analysis," Advances in Spatial Science, in: Riccardo Crescenzi & Marco Percoco (ed.), Geography, Institutions and Regional Economic Performance, edition 127, pages 39-58, Springer.
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    More about this item

    Keywords

    invisible hand; total factor productivity;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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