Productivity effects of redistribution in a socialist economy: The case of Yugoslavia

Based on the decomposition of labor input into fixed contractual and variable non-contractual contributions of effort and information, a theoretical model is constructed focusing on the distribution and redistribution of income as practiced in Yugoslav firms. The personal income of a worker is modeled as consisting of a contractual part, distributed according to effort, and a non-contractual part representing the claim to a share in the firm's residual, distributed "according to needs". Furthermore, two types of income redistribution--interfirm and intrafirm--are explicitly modeled. Both are conceptualized as tax-subsidy schemes. The former is based on the empirically identified interfirm transfer function. Intrafirm redistribution is modeled as if the personal income based on true worker productivity is taxed and distributed in a form of equal per capita subsidy.; The theoretical model is employed to obtain the equilibrium level of effort supplied by each worker, as dictated by worker utility maximization. In addition, the median voter theorem is applied to generate endogenously intrafirm distribution of personal incomes.; The model yields appealing comparative statics results. In general, the lower the rates of redistribution (either inter- or intra-firm), the lower the non-conditional amount of interfirm transfers, and the higher the team cohesion, the larger the equilibrium provision of work effort, and, consequently, the larger the output of the firm.; The theory is tested on data consisting of 403 Slovenian firms for 1986. The results strongly support it. They point to an important welfare loss (of the order of 6%-7% of GNP) attributable to institutional inefficiencies creating the redistribution focused on in the dissertation, as well as strong potential of factors determining conduciveness of environment for cooperation (like self-management) for increasing productivity.