Shortages in Socialism partly caused by Bribery

Sunday, Aug 22, 2010

Dr. Andrei Shleifer is an economist at Harvard:

The single most pervasive phenomenon in socialist countries is shortage of goods. Consumer goods ranging from necessities, such as food, to luxuries, such as cars and gold, as well as many intermediate inputs, are typically in short supply.

Standard explanations of shortages of goods under socialism are not completely persuasive... In the former Soviet Union, shortages of some goods, such as cars, have lasted for decades, without any price increases... The government has long been trying to extract the excess savings from the rich, and raising prices of luxuries would have been a natural way of doing this. It does not appear, then, that fairness is the real issue.

We argue that an important reason for pervasive shortages is self-interested behavior by the ministry bureaucrats who set the planned prices and output. These bureaucrats intentionally plan shortages in order to invite bribes from rationed consumers. If markets cleared, firms in an industry could earn profits, but most of these profits would accrue to the state treasury, not to the managers or the ministries. The key feature of socialism is that the decision makers who determine the prices and output of firms do not, to a first approximation, keep any of these profits. In contrast, when there is a shortage of a good, potential customers try to obtain it by offering bribes and favors to the bureaucrats in the ministry (and to the managers of the firms). These bribes tend to be much larger than the share of official profits that the bureaucrats and the managers are allowed to keep. And because the bribes are not official transactions, none of them goes to the treasury. As a result, the industry is better off creating a shortage of the goods and collecting the bribes than making official profits it cannot keep. To collect bribes, socialist industries will always try to produce a level of output entailing a shortage at official prices.

Pervasive Shortages under Socialism, Andrei Shleifer and Robert Vishny, The Rand Journal of Economics, Summer 1992, http://www.economics.harvard.edu/faculty/shleifer/files/pervasive_shortages.pdf.