Optimal Technological Choices After a Structural Break: The Case of the Former Communist Economies

This article analyzes the transition observed after the fall of communism in Eastern Europe and the former Soviet Union. It uses a general equilibrium model whereby skill bias in production technology is optimally chosen. As observed in the data, the model produces significant temporary losses in output and physical capital, together with increases in the skill premium, suggesting that part of the transition could be explained by a costly process of adjustment to new technologies.