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Political Risk Aversion

Author

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  • Ms. Laura Valderrama

Abstract

This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. We show how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what we call political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform. We endogenize institutional reform and show a non-monotonic relationship between institutional efficiency and the size of innovation.

Suggested Citation

  • Ms. Laura Valderrama, 2009. "Political Risk Aversion," IMF Working Papers 2009/194, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2009/194
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    Cited by:

    1. Fuhai Hong & Larry Karp, 2014. "International Environmental Agreements with Endogenous or Exogenous Risk," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(3), pages 365-394.
    2. Bonatti, Luigi & Fracasso, Andrea, 2019. "Policy inertia, self-defeating expectations and structural reforms: can policy modeling cope?," Journal of Policy Modeling, Elsevier, vol. 41(5), pages 943-962.

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