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AASIM M. HUSAIN and RATNA SAHAY

Although key to the reform process in Central and Eastern Europe, large-scale privatization cannot be undertaken all at once. This paper analyzes the allocative efficiency implications of alternate sequences of privatization in a reforming planned economy with two sectors—an input-producing upstream sector and a final goods-producing downstream sector. The model focuses on the link, through an intermediate inputs market, between the two sectors. The impacts of exogenous shocks are highlighted to show how the inflexibility of public firms in responding to shocks constrains the production response of private firms operating in perfectly and imperfectly competitive markets.