Great expectations: a tale of two transitions—a survey of the evidence on expectations in transition economies

Abstract

Over a quarter of the world’s population lives in countries that have undertaken transitions from central planning to some form of market-based coordination. These transitions entail far-reaching and complex economic and institutional changes and have had widely divergent trajectories. Important strands of literature have emphasised the many strategic complementarities that characterise the transition process. Contrary to a widespread assumption, new functioning economic institutions and a robust legal framework do not necessarily arise when property rights are reconfigured in a highly unstable and uncertain environment. Multiple equilibria emerge and expectations may play a key role in equilibrium selection. In this paper, we review the vast empirical literature on transition economies to provide comprehensive evidence about expectations at the beginning of transition, gathering and organising information from disparate studies across a wide set of countries. We thus provide the first comprehensive survey of the literature on agents’ subjective perceptions of transition paths.