Abstract
The corporate governance problem of state enterprises in former communist economies can give rise to excessive wage claims and/or capital decumulation. This paper focuses on these problems, highlighting the dynamic links between wage behavior, the fiscal deficit, inflation, and the capital stock. The fiscal impact of higher wages works through the reduction in public enterprises' profits and, hence, government revenues from profit taxes. If wage and tax claims on firms' revenue are 'too high,' capital can be run down until wage claims are moderated by the fall in output. Copyright 1995 by The London School of Economics and Political Science.
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