Incentives and Static and Dynamic Gains from Market Reform in an Emerging Profits Model

Abstract

This paper develops a dynamic model to account for the enhanced incentive effects that result from market reform in the form of a move toward private property rights and competitive markets. The process of reform is captured through an emerging profits function which depends on effective prices and incentives to work harder. Static and dynamic output gains from reform are also derived through increases in total factor productivity and induced capital accumulation. The relative success of any market reform is seen to depend on the degree to which producers are willing to work harder, given enhanced incentives, and their willingness to postpone consumption in response to higher rates of return. The model is applied to the case of rice production in Vietnam over the period 1976-1994. The results show that the more extensive the degree of market reform the larger the effects on rice output, the capital stock and transitional growth rates, suggesting that incentives and competitive markets matter greatly.