Economic and Political Reforms in a Planned Economy

This paper investigates the economic and political reforms in a planned economy as the equilibrium responses to revolutionary threats. Which reform will be chosen depends on the initial degree of resource inequality between the elite and the mass. The probability of a successful revolution plays a role in implementing either economic or political reforms only when the resource disparity is not too severe. In this case political reform is more likely when the probability of revolution is lower and revolution is not costly and the introduction of market oriented system greatly improves the efficiency of the economy. It is also found that, when the introduction of market oriented system is enough for the prevention of revolution, the elite extract more from the mass with a higher tax rate as the probability of revolution becomes higher. With severe inequality in resource distribution, the elite give up their political power and democratic market oriented economic system is the only equilibrium outcome. We also consider conditions under which either economic or political reform is not enough to prevent revolution.