The role of the underground economy in determining the transformation of command economies: Allocative efficiency versus technological efficiency
Traditional thought on the transformation of command economies is usually based on restoring economic or allocative efficiency. The theory developed by Findlay and Wellisz (1986), however, focuses not only on allocative efficiency but also on technological inefficiency. These technological inefficiencies exist due to lax enforcement of economic plans and the presence of an underground economy. In these cases, liberalization would allow a country to shift to a higher production possibility frontier. The aim of this research is to test the validity of the Findlay-Wellise (1986) and to examine the assumption of concavity of the production frontier. The method of ordinary least squares has been used to estimate the equations that describe the implications of the model and canonical ridge regression technique has been used to estimate the production frontier and evaluate the concavity condition. We find very little support for the Findlay-Wellisz (1986) model. The production frontier for Bulgaria, former Czechoslovakia, Hungary, and former Yugoslavia, is locally linear and not concave to the origin. This finding could be a possible explanation for the negative results. On the other hand one could argue that the underground economy does not play a significant role in the command economies.
Ruparel, Viyjanta J, "The role of the underground economy in determining the transformation of command economies: Allocative efficiency versus technological efficiency" (1995). ETD Collection for Fordham University. AAI9530039.