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State capacity, redistributive compensation and the political economy of economic policy reform

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  • Jain, Sanjay
  • Majumdar, Sumon

Abstract

If governments can compensate “losers” from large-scale economic reform, such as trade liberalization, by redistributing some of the “winners'” gains, then any potentially Pareto-improving reform should be implemented. However, in many economies, the state's capacity to identify and tax winners is limited. How do such limitations impact the adoption of reforms? We show that for reforms where the distribution of winners and losers is exogenously given, higher state capacity unambiguously helps the adoption of Pareto-improving reforms. However, for reforms which require individual investment decisions by potential winners, better state capacity may not always translate into higher political support for reform.

Suggested Citation

  • Jain, Sanjay & Majumdar, Sumon, 2016. "State capacity, redistributive compensation and the political economy of economic policy reform," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 462-473.
    • Handle: RePEc:eee:reveco:v:42:y:2016:i:c:p:462-473
    DOI: 10.1016/j.iref.2015.10.025
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    More about this item

    Keywords

    Political economy; Redistribution; Compensation; State capacity;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F15 - International Economics - - Trade - - - Economic Integration
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • P11 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Planning, Coordination, and Reform
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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