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    Rauhankatu 19 B, Helsinki

Krisztina Orban (University of Chicago): The Inception of Capitalism through the Lens of Firms

Using firm-level data, I analyze one of the largest economic experiments of the twentieth century, the fall of communism. After communism ended, post-communist economies experienced a sharp decline and slow recovery of output. This paper studies the output pattern of these countries using microdata from Hungary from both communist and market economy times (1986-1999). I propose a novel decomposition of output change which allows me to quantify the role of productivity, inputs and allocative efficiency in output change. I find that the majority of the output drop is accounted for by a reduction in labor input. In contrast, the recovery in the 1990s largely reflects gains from within-industry reallocation of inputs toward more productive firms. Next, I explore the mechanisms through which the fall in labor and the gains in allocative efficiency operated. I find that during communism, a large share of firms employed an inefficiently high number of people given the wages firms paid. During the transition, these firms saw their employment decrease 40% more relative to other firms. In particular, these firms shed more low-educated, blue-collar, older, and female workers. The evidence is consistent with the interpretation that the corporate sector in communism provided a social safety net in addition to producing output. With regard to the recovery, I provide evidence consistent with the bank privatization having improved allocative efficiency of capital by removing frictions caused by state banks.

BOFIT seminars are open to all researchers interested in the subjects covered. Those wishing to attend a seminar are kindly asked to register in advance, by email bofit(at)bof.fi or tel. +358 9 183 2268.

Seminars take place, as a rule, on Tuesdays, starting at 10.30 a.m. Visitors are escorted to the seminar room from the Rauhankatu 19 B (Library) entrance.