Equilibrium transition from centralization to competitive market: Stochastic approach

The paper deals with modelling changes of economic mechanism. Unlike most of the dynamic equilibrium models, both producers and consumers in our model act under budget restrictions. We associate different principles of budgets forming with different economic mechanisms and state a problem of transition from one economic mechanism to another. We focus on the following two mechanisms. The first one assumes the presence of Central Planning Board ({open_quotes}the State{close_quotes}) and may identify with centralized (state controlled) economy. Under the second mechanism, the role of the State is eliminated and its distributive functions are moved to the Market. In the framework of dynamic equilibrium theory we pro pose a model of gradual transition from economy with centralized budgets regulation to market economy. It is assumed that information about possible change of economic mechanism affects essentially on behavior of agents. Duration of transition period is regarded as a random variable. We study conditions when such transition allows firms to adapt their plans to future markets and guarantees the existence of equilibrium paths. The case of Shock (instantaneous transition), which may bring bankruptcy, jump of prices and deficit, is also discussed.