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On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship

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  • Murat Iyigun
  • Dani Rodrik

Abstract

We analyze the interplay of policy reform and entrepreneurship in a model where investment decisions and policy outcomes are both subject to uncertainty. The production costs of non-traditional activities are unknown and can only be discovered by entrepreneurs who make sunk investments. The policy maker has access to two strategies: policy tinkering,' which corresponds to a new draw from a pre-existing policy regime, and institutional reform,' which corresponds to a draw from a different regime and imposes an adjustment cost on incumbent firms. Tinkering and institutional reform both have their respective advantages. Institutional reforms work best in settings where entrepreneurial activity is weak, while it is likely to produce disappointing outcomes where the cost discovery process is vibrant. We present cross-country evidence that strongly supports such a conditional relationship.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10455.

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Date of creation: Apr 2004
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Publication status: published as Eicher, Theo S. and Cecilia Garcia-Penalosa (eds.) Institutions, Development, and Economic Growth CESifo Seminar Series. Cambridge and London: Cambridge University Press, 2006.
Handle: RePEc:nbr:nberwo:10455

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  1. Zilibotti, Fabrizio & Aghion, Philippe & Acemoglu, Daron, 2006. "Distance to Frontier, Selection, and Economic Growth," Scholarly Articles 4554122, Harvard University Department of Economics.
  2. Ricardo Hausmann & Dani Rodrik, 2002. "Economic Development as Self-Discovery," NBER Working Papers 8952, National Bureau of Economic Research, Inc.
  3. Ricardo J. Caballero & Mohamad L. Hammour, 2001. "Creative Destruction and Development : Institutions, Crises and Restructuring," DELTA Working Papers 2001-04, DELTA (Ecole normale supérieure).
  4. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
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Cited by:
  1. Greif, Avner & Iyigun, Murat & Sasson, Diego, 2011. "Risk, Institutions and Growth: Why England and Not China?," IZA Discussion Papers 5598, Institute for the Study of Labor (IZA).
  2. Marcus Dejardin & Helene Laurent, 2014. "Greasing the wheels of entrepreneurship? A complement according to entrepreneurial motives," Working Papers 1402, University of Namur, Department of Economics.
  3. repec:hal:wpaper:halshs-00564653 is not listed on IDEAS
  4. Mina Baliamoune-Lutz & Zuzana Brixiová & Léonce Ndikumana, 2012. "Credit constraints and productive entrepreneurship in Africa," ICER Working Papers 23-2011, ICER - International Centre for Economic Research.
  5. Gries, Thomas & Naude, Wim, 2008. "Entrepreneurship and Regional Economic Growth: Towards A General Theory of Start-Ups," Working Paper Series RP2008/70, World Institute for Development Economic Research (UNU-WIDER).
  6. Ciarli, Tommaso & Parto, Saeed & Savona, Maria, 2010. "Conflict and Entrepreneurial Activity in Afghanistan: Findings from the National Risk Vulnerability Assessment Data," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
  7. Naudé, Wim, 2011. "Entrepreneurship is Not a Binding Constraint on Growth and Development in the Poorest Countries," World Development, Elsevier, vol. 39(1), pages 33-44, January.
  8. Camacho, Andriana & Rodriguez, Catherine, 2010. "Firm Exit and Armed Conflict in Colombia," Working Paper Series wp2010-94, World Institute for Development Economic Research (UNU-WIDER).
  9. Clément Imbert, 2011. "Decomposing wage inequality: Public and private sectors in Vietnam 1993-2006," PSE Working Papers halshs-00564653, HAL.
  10. Wim Naudé, 2010. "Peace, Prosperity, and Pro-Growth Entrepreneurship," Working Papers id:3001, eSocialSciences.
  11. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
  12. Mina Baliamoune-Lutz & Zuzana Brixiová & Léonce Ndikumana, 2011. "Credit Constraints & Productive Entrepreneurship in Africa," William Davidson Institute Working Papers Series wp1025, William Davidson Institute at the University of Michigan.
  13. Iyigun, Murat, 2012. "Are We There Yet? Time for Checks and Balances on New Institutionalism," IZA Discussion Papers 6934, Institute for the Study of Labor (IZA).
  14. Mina Baliamoune-Lutz, 2007. "Entrepreneurship, Reforms, and Development: Empirical Evidence," ICER Working Papers 38-2007, ICER - International Centre for Economic Research.

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