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Can Market Failure Cause Political Failure

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  • Morelli, Massimo
  • Ghatak, Maitreesh
  • Aney, Madhav

Abstract

We study how inefficiencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, where agents are endowed heterogeneously with wealth and talent. In our model, market failure due to unobservability of talent endogenously creates a class structure that affects voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.

Suggested Citation

  • Morelli, Massimo & Ghatak, Maitreesh & Aney, Madhav, 2011. "Can Market Failure Cause Political Failure," CEPR Discussion Papers 8533, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8533
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    Cited by:

    1. Jaimovich, Esteban & Rud, Juan Pablo, 2014. "Excessive public employment and rent-seeking traps," Journal of Development Economics, Elsevier, vol. 106(C), pages 144-155.

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    More about this item

    Keywords

    Occupational choice; Adverse selection; Property rights; Asset liquidation; Political failure; Market failure;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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