Expectations, authority and divergent market transitions

Over 35 countries have embarked on transitions from planned to market economies over the last forty years, with widely divergent outcomes and momentous political, institutional, and economic consequences. We argue that social expectations played a critical but underappreciated role in shaping transition outcomes. We present a formal model of market transition as an assurance game with two possible self-enforcing equilibria, economic collapse or sustained growth. We then adduce evidence from available historical surveys that confirms that enterprise managers’ expectations differed widely and correlated with transition outcomes as predicted by the model. Our main point of departure from extant institutionalist scholarship on market transitions is our emphasis on expectations and their interaction with economic institutions. Instead of treating institutional strength as an exogenous factor that determines outcomes directly, we draw attention to the catalytic effect of expectations at the outset of transition, a moment of exceptional institutional fluidity and uncertainty. • We revisit the puzzle of widely divergent outcomes of market transitions. • Our framework suggests that social expectations played a critical role in shaping outcomes. • We present a parsimonious formal model of market transition as an assurance game. • Both economic collapse and sustained growth can be self-enforcing equilibria. • A law enforcement apparatus does not make the bad equilibrium less likely. • Historical survey evidence on expectations is consistent with the main predictions of our model.