Scholars often study the introduction of markets in the presence of functioning state institutions and frequently analyze the creation of state regulatory institutions in the presence of functioning markets, but the postcommunist cases offer the rare occasion to study the processes of creating markets and state regulatory institutions at the same time in real time. This chapter takes advantage of this opportunity and develops an argument that identifies how politicians make choices about economic and institutional reform. More specifically, it focuses on how partisan control of the government, the balance of partisan power, and the quality of democratic institutions affect the pace and consistency of economic and institutional reform. I begin by discussing the logic of the problem of credible commitment that underpins much of the analysis, before developing the argument.

Credible commitment problems are inherent in economic and institutional reforms because they promise benefits in the future for changes in behavior today. Consider a government that announces a sweeping reduction on import tariffs. Given this change in policy, firms may want to enter the importing business. However, because the creation of a new business entails up-front costs and only the promise of future benefits, this decision creates risks.