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Delay in Fiscal Reform

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  • Kentaro Katayama

    (Policy Research Institute)

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    Abstract

    This paper analyzes the political economy of delayed agreement over fiscal reforms, in a setting where two interest groups can bargain over the allocation of the cost of the stabilization. This contrasts with the classic contribution of Alesina and Drazen, who assume that a group which concedes earlier bears a fixed disproportionate share of the burden. The approach of this paper is to study an alternating offers model of bargaining in the economic environment of Alesina and Drazen i.e. where bargaining takes place in continuous time, and there is two-sided uncertainty. This allows a systematic comparison of expected delay in the bargaining game and in the concession game of Alesina and Drazen. When interest groups are sufficiently patient, or when shares in the concession game are very unequal, agreement is reached more quickly on average under bargaining. But, both games have the common feature that delay signals the toughness of the interest group.

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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Microeconomics Working Papers with number 23075.

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    Date of creation: Jan 2008
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    Handle: RePEc:eab:microe:23075

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    Related research

    Keywords: Strategic Delay; Stabilization; Bargaining; Coalition;

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    1. Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers, Stockholm - International Economic Studies 630, Stockholm - International Economic Studies.
    2. Alessandra Casella & Barry Eichengreen, 1994. "Can Foreign Aid Accelerate Stabilization?," NBER Working Papers 4694, National Bureau of Economic Research, Inc.
    3. César Martinelli & Raúl Escorza, 2005. "When Are Stabilizations Delayed? Alesina-Drazen Revisited," Levine's Bibliography 122247000000000667, UCLA Department of Economics.
    4. Persson, Torsten & Tabellini, Guido, 1999. "Political Economics and Public Finance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2235, C.E.P.R. Discussion Papers.
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