Dual Track Reforms: With and Without Losers

(1 + δ)(MV - P) = δ(MV - P^e),
1+δ

Since each buyer is assumed to use at most one unit of the commodity, each point on D in
Figure 1 represents the marginal willingness to pay for a particular buyer. Thus, when δ = 1
for example, a buyer with marginal willingness equal to a will have a “strategic willingness
to pay” in the first period equal to b = ^a+^c.

Suppose, on the other hand, that a buyer’s marginal willingness to pay is instead lower
than P^e. As we have discussed earlier, such a buyer will never actually consume the product
in the second period, but will instead sell the commodity back to the market track⁵ . For
such a buyer, transacting in the first period leads to a (positive or negative) profit P^e - P
in the second, since he can use the market track to fulfill his obligation. Consequently, the
total payoff for such a buyer to transact in the first period is

MV -P+δ(P^e-P).

If, on the other hand, the buyer does not engage in a transaction in the first period, he will
be free from any obligation to trade in the second, and will not enter in a transaction at that
time since MC > P^e. Consequently, a buyer with a marginal willingness to pay lower than
P ^e is indifferent between buying or not in the first period at the price P when

In Figure 1, a buyer with the marginal willingness to pay g has a “strategic willingness to
pay” f = ^e+g when δ = 1. We can summarize our previous discussion in the following

Lemma 2 Let P be the first period price and P^e be the second period equilibrium price in
the market track. The first period supply in anticipation of the dual track liberalization in

⁵In the case of a labor market, this means that an employer, who is compelled to hire his old employees
with the value of marginal product of labor lower than the market wage rate, will second these workers.

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