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Can Market Failure Cause Political Failure?

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  • Madhav S, Aney
  • Maitreesh Ghatak
  • Massimo Morelli

Abstract

We study how inefficiencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, where agents are endowed heterogeneously with wealth and talent. In our model, market failure due to unobservability of talent endogenously creates a class structure that affects voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economic Organisation and Public Policy Discussion Papers Series with number 029.

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Date of creation: Jul 2011
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Handle: RePEc:cep:stieop:029

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

Keywords: occupational choice; adverse selection; property rights; assetliquidation; political failure; market failure.;

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  1. Alessandra Bonfiglioli & Gino Gancia, 2010. "The political cost of reforms," Economics Working Papers 1250, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2011.
  2. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  3. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
  4. Daron Acemoglu, 2003. "The Form of Property Rights: Oligarchic vs. Democratic Societies," NBER Working Papers 10037, National Bureau of Economic Research, Inc.
  5. Marcel Boyer & Jean-Jacques Laffont, 1999. "Toward a Political Theory of the Emergence of Environmental Incentive Regulation," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 137-157, Spring.
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Cited by:
  1. Esteban Jaimovich & Juan Pablo Rud, 2009. "Excessive Public Employment and Rent-Seeking Traps," Carlo Alberto Notebooks 118, Collegio Carlo Alberto.

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