welfare effect of the anticipated dual-track liberalization. The analysis is carried out in
two steps. Section 5.1 considers the case in which the status quo policy involves only one
intervention, while Section 5.2 investigates the scenario where the status quo policy concerns
multiple dimensions. Section 6 concludes.
2 The Model
To introduce our discussion in the simplest possible framework, we follow Lau, Qian, and
Roland (2000) and use a partial equilibrium setup, in which a continuum of buyers and
producers each demand and supply one and only one unit of a commodity.3 All agents are
price-takers. Differently from Lau, Qian, and Roland (2000), our model has two-periods.
In the first, the market is distorted by a government policy that might involve direct price
setting, quotas, taxes or subsidies. In the second the government implements a reform
aimed at removing this distortion. Buyers’ preferences are time separable and invariant, and
producers’ costs remain constant over time. Both sets of agents have a discount factor δ,
and the commodity is assumed to be perishable.
To minimize potential opposition, the government introduces the reform in a dual track
fashion in the second period. As a result, a “market” and a “regulated” track emerge in the
second period. In the former, agents are free to enter new exchanges. In the latter, private
agents are instead assigned rights and obligations derived from the first period transactions
carried out under the original government policy. That is, if private agents carried out an
exchange of a given quantity at a certain price in the first period, the very same transaction
will be enforced in the second period. As an example, think about the case of a labor market
in which, in the first period labor contracts between workers and employers are governed
by a Union agreement specifying the wage rate. In the second period, the government
introduces a reform, which allows newly hired workers to be paid a (lower) market wage
rate, but at the same time requires employers to continue to pay the same union-set wage
rate to those workers they have previously employed. In other words, a dual track approach
requires contracts governing first period transactions to continue to be enforced in the second
period.4At the same time, the reform calls for the establishment of a market track, where
3For a general equilibrium analysis of the dual-track mechanism, see Lau, Qian, and Roland (1997).
4In addition, if the original government policy involved a transfer (i.e. a tax or a subsidy) to an agent in