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Delay in Fiscal Reform

  • Kentaro Katayama

    (Policy Research Institute)

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    This paper analyzes the political economy of delayed agreement over fiscal reforms, in a setting where two interest groups can bargain over the allocation of the cost of the stabilization. This contrasts with the classic contribution of Alesina and Drazen, who assume that a group which concedes earlier bears a fixed disproportionate share of the burden. The approach of this paper is to study an alternating offers model of bargaining in the economic environment of Alesina and Drazen i.e. where bargaining takes place in continuous time, and there is two-sided uncertainty. This allows a systematic comparison of expected delay in the bargaining game and in the concession game of Alesina and Drazen. When interest groups are sufficiently patient, or when shares in the concession game are very unequal, agreement is reached more quickly on average under bargaining. But, both games have the common feature that delay signals the toughness of the interest group.

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    File URL: http://www.eaber.org/node/23075
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    Paper provided by East Asian Bureau of Economic Research in its series Microeconomics Working Papers with number 23075.

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    Date of creation: Jan 2008
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    Handle: RePEc:eab:microe:23075
    Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
    Web page: http://www.eaber.org

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    1. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
    2. Torsten Persson & Guido Tabellini, 1999. "Political Economics and Public Finance," NBER Working Papers 7097, National Bureau of Economic Research, Inc.
    3. César Martinelli & Raúl Escorza, 2005. "When Are Stabilizations Delayed? Alesina-Drazen Revisited," Levine's Bibliography 122247000000000667, UCLA Department of Economics.
    4. Casella, Alessandra & Eichengreen, Barry, 1994. "Can Foreign Aid Accelerate Stabilization?," CEPR Discussion Papers 961, C.E.P.R. Discussion Papers.
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