COMPARATIVE ECONOMICS FIELD EXAM
May 2011
Department of Economics
UC Berkeley
Answer all four questions.
1. Write down the soft budget constraint (Dewatripont-Maskin) model with a state
enterprise. Use this model to show the effect of enterprise privatization. To what extent
does privatization solve the soft budget constraint problem? (5 points)
2. Assume an institutional reform program with 2 reforms i=1 and 2. Consider 2
situations: 1) only idiosyncratic uncertainty over reforms where each agent has the
probability pi of getting a positive outcome gi >0 and (1-pi) of getting a negative outcome
li<0; only aggregate uncertainty where there is the same probability pi of getting a
positive aggregate outcome Gi >0 and the probability (1-pi) of getting a negative
aggregate outcome Li <0. Compare formally the costs and benefits of a big bang and a
gradualist strategy of reforms in the two cases. When gradualism is optimal, what can be
said about sequencing of reforms in the context of those specific assumptions? How do
you relate these results to reform processes in the real world? (5 points)
3. In China it is said that local governments have helped the reform process and
economic growth. In Russia, it is said that local governments have hurt enterprise
expansion by their predatory behavior. How can one explain these differences? What
does the literature say about this? (5 points)
4. What are considered the main institutional reasons behind the success of Chinese
growth and reform in the last 30 years? What does the literature say about this? Discuss
various important points. Compare the answer to the standard approach of the role of
institutions on growth (5 points).