Some capital market failures in the socialist labor-managed economy

We examine the behavior of the labor-managed firm in the capital market and show that the decentralization of capital allocation decisions in the socialist labor-managed economy is hazardous. We first show that the firm's behavior, when equilibrium is disturbed, is disequilibrating, and that therefore the importance of free entry is greater in this economy than in a capitalist one. We then establish that the difficulties raised by the credit-rationing literature are next to insoluble in the labor-managed market, due to the impossibility of requiring any collateral in a socialist market. As a result, free entry is impossible. We conclude that meaningful decentralization is impossible in the socialist labor-managed economy.