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The Political Cost of Reforms

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  • Alessandra Bonfiglioli
  • Gino Gancia

Abstract

This paper formalizes in a fully-rational model the popular idea that politicians perceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters. To do so, it proposes a model of elections where political ability is ex-ante unknown and investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians make too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannot be fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to the conventional wisdom, uncertainty makes reforms more politically viable and may, under some conditions, increase social welfare. The model is then used to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistent with a number of empirical regularities on the determinants of reforms and reelection. They are also consistent with a new stylized fact documented in this paper: economic uncertainty is associated to more reforms in a panel of 20 OECD countries.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 503.

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Date of creation: Sep 2010
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Handle: RePEc:bge:wpaper:503

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Keywords: Elections; Reforms; Asymmetric Information; Uncertainty;

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References

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Cited by:
  1. Alessandra Bonfiglioli & Gino Gancia, 2012. "Growth, Selection and Appropriate Contracts," Working Papers 566, Barcelona Graduate School of Economics.
  2. Giacomo Ponzetto & Ugo Troiano, 2014. "Social Capital, Government Expenditures, and Growth," Working Papers 612, Barcelona Graduate School of Economics.
  3. Aney, Madhav & Ghatak, Maitreesh & Morelli, Massimo, 2011. "Can Market Failure Cause Political Failure," CEPR Discussion Papers 8533, C.E.P.R. Discussion Papers.
  4. repec:cge:warwcg:121 is not listed on IDEAS

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