Can Market Failure Cause Political Failure?
AbstractWe 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 InfoPaper 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.
Date of creation: Jul 2011
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occupational choice; adverse selection; property rights; assetliquidation; political failure; market failure.;
Other versions of this item:
- Ghatak, Maitreesh & Aney, Madhav S & Morelli, Massimo, 2013. "Can Market Failure Cause Political Failure?," CAGE Online Working Paper Series 122, Competitive Advantage in the Global Economy (CAGE).
- Aney, Madhav & Ghatak, Maitreesh & Morelli, Massimo, 2011. "Can Market Failure Cause Political Failure," CEPR Discussion Papers 8533, C.E.P.R. Discussion Papers.
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- I - Health, Education, and Welfare
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