PRELIMINARY DRAFT NOT FOR QUOTATION Optimal Speed of Transition: Micro Evidence from the Czech Republic

We consider the growing theoretical literature on the optimum speed of transition (OST) and explore its validity using micro data from a transition economy. First, we ask whether the OST theories focus on the empirically most important job and worker reallocation flows. Second, we examine the relationship between these flows suggested by the theory. The empirical evidence from the Czech Republic appears to match the theory's prescriptions. It underscores the main policy implication of the Aghion and Blanchard (1994) model that early support for private job creation is the recipe for a successful transition. * A joint workplace of the Center for Economic Research and Graduate Education, Charles University, Prague, and the Economics Institute of the Academy of Sciences of the Czech Republic. Address: CERGE-EI, POB 882, Politickych veznu 7, Prague 1, 111 21, Czech Republic; Tel.:+420-2-24005139; E-mail: [email protected] ** William Davidson Institute, University of Michigan Business School, Ann Arbor, MI 48109. Tel: (734) 615-4558; E-mail: [email protected] Acknowledgements: This work was supported by NCEEER grant no. 812-32 (Jurajda and Terrell) and by an NSFNATO Fellowship (Jurajda). We would like to thank John Ham for numerous helpful discussions and valuable suggestions. Further thanks go to Gerard Roland, Pavle Petrovic, Jan Svejnar, and Jan Hanousek. We benefited from comments of participants at the IZA/WDI Conference on “Labor Markets in Transition Economies”, the CEPR/WDI Annual International Conference on Economics of Transition, and of seminar participants at LICOS of the Catholic University of Leuven, the University of Michigan, and CERGE-EI.