A model of the Soviet firm

Abstract

The Liberman reforms of 1962 modify the above model somewhat, though they do not change it in any fundamental way. The problem of systematic misinformation is attacked by opting for a bonus based not on profit achieved but rather, on an average of the profit achieved and the planned profit. Thus there is an incentive to divulge more information, but the awareness (on the part of managers) that higher performance will affect bonus norms is not removed. Also, because it is profits that determine bonuses, a firm now has an incentive to reduce costs — if it keeps its output constant (and thus the output norm constant) it can still get a higher bonus by reducing costs and hence increasing profits. But, clearly, this too fails; we have merely added another dimension to the conflict. Managers will soon recognize that not only output norms but also profitability norms are sensitive to achieved output and profit. Thus the Liberman reforms, though implicitly recognizing the problems involved, do not introduce the structural changes needed to remove the conflict.