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On the Dynamic Consistency of Reform and Compensation Schemes

  • C. A. Claussen

To make reform possible, politically strong losers have to be bought out. Whether the losers are fully compensated upfront or given running compensation depends on their political influence after reform. We build a simple but general model to study dynamic consistency of compensation and political support for reform. We find that positive but decreasing compensation is required in every period up to the last period the losers have political influence. In that period it increases dramatically. If there are limited resources available to compensate the losers upfront, increasing the cost of reversing the reform may reduce the political feasibility of reform.

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Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 5 (2002)
Issue (Month): 3 ()
Pages: 133-144

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Handle: RePEc:taf:jpolrf:v:5:y:2002:i:3:p:133-144
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  1. Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x, June.
  2. Dani Rodrik, 2000. "Institutions for High-Quality Growth: What They are and How to Acquire Them," NBER Working Papers 7540, National Bureau of Economic Research, Inc.
  3. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  4. Mariano Tommasi & Andres Velasco, 1995. "Where Are We in the Political Economy of Reform?," Working Papers 11, Universidad de San Andres, Departamento de Economia, revised Apr 1996.
  5. Geir Asheim & Carl Claussen & Tore Nilssen, 2006. "Majority voting leads to unanimity," International Journal of Game Theory, Springer, vol. 35(1), pages 91-110, December.
  6. James A. Robinson & Daron Acemoglu, 2000. "Political Losers as a Barrier to Economic Development," American Economic Review, American Economic Association, vol. 90(2), pages 126-130, May.
  7. Lawrence J. Lau & Yingyi Qian & Gerald Roland, 1997. "Reform Without Losers: An Interpretation of China's Dual-Track Approach to Transition," William Davidson Institute Working Papers Series 137, William Davidson Institute at the University of Michigan.
  8. Lau, Lawrence J. & Qian, Yingyi & Roland, Gerard, 1997. "Pareto-improving economic reforms through dual-track liberalization," Economics Letters, Elsevier, vol. 55(2), pages 285-292, August.
  9. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
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