Abstract
This paper incorporates illegal parallel markets into a two-period, general-equilibrium model of a centrally planned economy. It is shown that a desire for capital accumulation stronger on the part of the state than that of private individuals is by itself insufficient to give rise to the parallel market. If private producers can operate more efficiently than state enterprises, however, the parallel market will emerge. The effect of the parallel market will be to expand comsumption in both periods and, hence, to raise welfare. Under some conditions, the parallel market will leave the level of investment unchanged. The paper derives several additional results.
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