Abstract
This paper discusses the occurrence of the famous ratchet effect in a Soviet-type economy. Typically, planners do not have a precise knowledge of the enterprise's capacities and plans may be viewed as the planner's expectations of these capacities. Whereas the existing models in the literature assume a rather crude version of the adaptive expectations hypothesis, the case for the rational expectations hypothesis is argued here. In order to assess the extent of the ratchet effect, we compare four situations combining an adaptive versus rational planner with a manager who believes that plans are formed adaptively versus rationally. With the help of a model describing the manager's behavior under these four polar assumptions, it is shown that the presence of the ratchet effect strongly depends on the assumptions made about the planner's expectations.
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