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Abstract

This paper discusses whether compensation payments in a transition economy can contribute to a reduction of the conflict between winners and losers of the transformation. The political relevancy of this issue is obvious. The failure of both parties to realize their political objectives due to a lack of power, they will obstruct each other, restraining the transformation process. The analysis is based on an overlapping generation model following DIAMOND, which was extended by technical progress relevant for productivity and improvement of the product quality. Hence, whether the aim of the compensatory payments will be achieved or not, depends on their financing and on the reference point of the household in assessing the effects of transfer payments. Older households, i.e. potential losers, will prefer generally a way of financing the payments which are for the younger generation, as the potential winners, disadvantageous.

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