The prevention of wide income differentials was an important political objective in prereform Central and Eastern Europe. This objective was widely achieved, however, at the cost of a severe misallocation of resources and economic stagnation. In order to channel resources into more productive uses, many countries have introduced bold, market-oriented reforms aimed at correcting distorted relative prices. Coupled with sustained financial adjustment, these measures have contributed to a marked increase in economic efficiency, and most countries in transition have seen a turnaround in output. However, relative price changes inevitably bring about important distributional effects.1 Very few studies (for example, Stodder (1991)) have tried to estimate the welfare implications of the transition process; they suggest that the potential opportunity costs of rising inequality may be significant. This may be an important reason why some countries, particularly many countries of the former U.S.S.R., have moved rather cautiously in introducing market-oriented reforms.