Equilibrium Goods Runs: The Generation of Shortage in Socialist Economies"

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The purpose of this paper is to examine the problem of the recurrent shortages of consumer goods that plague Soviet-type economies. We analyze this problem in the context of a model where agents act rationally, and where these shortages, or as we prefer to call them, goods runs, represent equilibrium behavior. We develop a two-good two-period model of an economy the equilibria of which may or may not display goods runs. Our model allows us to explain several important features of goods runs. First, we are able to explain how goods runs can occur even without a significant disruption of current production. The reason is that multiple equilibria appear to be a generic feature of models where some goods have fixed prices. Second, we are able to explain why once a goods run starts, it is very difficult to end. This occurs, because the goods-run equilibrium is the only stable equilibrium in the model. Third, we show that an identical economy where prices clear markets does not exhibit the goods run phenomenon. Hence our model explains how goods runs may appear even when there is no aggregate excess demand in the economy.
JEL Classification No: 020, 050.

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