MEMORANDUM No 25 / 99 RENT GRABBING AND RUSSIA ’ S ECONOMIC COLLAPSE

Focussing on transition dynamics, we contrast early expectations for a welfare promoting market economy in Russia and their adverse realizations. A model is set up to show how initial conditions and reform policies can stimulate undesirable rent grabbing behavior. In the path dependant processes of the model, a “dishonesty multiplier” may result, leading to a sustained adverse outcome. Conventional policies to overcome this outcome are found to be ineffective. Instead, restoring a beneficial path requires policies that redirect incentives in a more acceptable direction.

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