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On the Dynamic Consistency of Reform and Compensation Schemes

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  • C. A. Claussen

Abstract

To make reform possible, politically strong losers have to be bought out. Whether the losers are fully compensated upfront or given running compensation depends on their political influence after reform. We build a simple but general model to study dynamic consistency of compensation and political support for reform. We find that positive but decreasing compensation is required in every period up to the last period the losers have political influence. In that period it increases dramatically. If there are limited resources available to compensate the losers upfront, increasing the cost of reversing the reform may reduce the political feasibility of reform.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/1384128021000066107
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 5 (2002)
Issue (Month): 3 ()
Pages: 133-144

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Handle: RePEc:taf:jpolrf:v:5:y:2002:i:3:p:133-144

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Related research

Keywords: Credibility; Compensation; Liquidity Constraint; Political Economy; Reform; Uncertainty;

References

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  1. Lawrence J. Lau & Yingyi Qian & Gerard Roland, . "Pareto-Improving Economic Reforms through Dual-Track Liberalization," Working Papers 97007, Stanford University, Department of Economics.
  2. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  3. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  4. Lawrence J. Lau & Yingyi Qian & Gerard Roland, 2000. "Reform without Losers: An Interpretation of China's Dual-Track Approach to Transition," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 120-143, February.
  5. Rodrik, Dani, 2000. "Institutions For High-Quality Growth: What They Are And How To Acquire Them," CEPR Discussion Papers 2370, C.E.P.R. Discussion Papers.
  6. James A. Robinson & Daron Acemoglu, 2000. "Political Losers as a Barrier to Economic Development," American Economic Review, American Economic Association, vol. 90(2), pages 126-130, May.
  7. Gérard Roland, 2000. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182033, December.
  8. Asheim , Geir B. & Claussen , Carl Andreas & Nilssen, Tore, 2005. "Majority voting leads to unanimity," Memorandum 02/2005, Oslo University, Department of Economics.
  9. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
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Cited by:
  1. Geir Asheim & Carl Claussen & Tore Nilssen, 2006. "Majority voting leads to unanimity," International Journal of Game Theory, Springer, vol. 35(1), pages 91-110, December.

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