We present a simple model to analyse law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyse two institutional mechanisms for solving the coordination problem. A first mechanism, which we call ‘dualism’, follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the ‘bad’ equilibrium, provided the ‘accessing’ country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2501.
Find related papers by JEL classification: H40 - Public Economics - - Publicly Provided Goods - - - General H50 - Public Economics - - National Government Expenditures and Related Policies - - - General K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Gérard Roland & Thierry Verdier, 1999.
"Transition and the output fall,"
The Economics of Transition,
The European Bank for Reconstruction and Development, vol. 7(1), pages 1-28, March.
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