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could be evidence of the existence of sneaky price controls that allow local politicians to collect unobserved rents from exports. However, price controls on locally sold food and consumer goods could not be sneaky for very long. These goods are sold in local markets on a daily basis, and it is local constituents who must pay the posted prices and bribes. Eventually they, and others, would learn that their actions were enriching their elected politicians.

Berkowitz (1996) develops a model in which local politicians maximize constituent loyalty rather than bribes. In this model, a locally regulated state firm and an unregulated private firm compete in price, subject to capacity constraints in the local market.8 The private firm maximizes profits, while the state firm maximizes a political objective represented as a weighted sum of consumer surplus and industry profits. In this scenario, a local government will set a low price that induces rationing in the state sector when the private sector has a small capacity, and therefore can be induced to behave competitively. However, if the private sector is large enough and is able to exercise monopoly power, the local government is more likely to set a higher market-clearing price in the state sector. Thus, private capacity is a critical determinant of whether a local government sets a low rationing price or a higher market-clearing price.

The reason for this result is that private firms in a small and competitive private sector will always sell at full capacity and hence undercut any state price higher than the competitive price. Therefore, when the private sector is small and competitive, the state sector serves the public interest by setting the lowest possible state price and transferring all of the gain to its constituents. However, when the private sector is large enough to exert monopoly power, its pricing policy depends on state-sector prices. If the latter prices are high, the private sector will undercut the state firm and sell at full capacity, whereas if those prices are low, the private sector will choose the monopoly price and constrain sales to less than full capacity. While increases in state-sector prices will have a direct negative effect on the welfare of constituents shopping in state stores, a sufficiently high state-sector price will have the indirect positive effect of constraining monopolistic behavior in the private sector. When this second (indirect) effect dominates the first (direct) effect, local governments will tend to support price liberalization. This will occur in situations where the private sector is large enough to have substantial monopoly power and where state-sector technology is inefficient.

It is not possible to test the Berkowitz model rigorously, as the necessary data on private and state capacity holdings are not available. Some educated guesses about private versus state capacity holdings, however, can be made using data cited in Brooks et al. (1996:Ch. 1, Table 8-1.12). During 19911994, the share of milk procured and marketed by state organs in the Russian Federation fell minimally, from 98 to 93 percent. However, the nonstate

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It is straightforward to extend the analysis to more than one private and/or state firm.



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