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Why Are Stabilizations Delayed?

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  • Alesina, A.
  • Drazen, A.

Abstract

When a stabilization has significant distributional implications (as in the case of tax increases to'eliminate a large budget deficit) different socio—economic groups with conflicting distributional objectives may attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes.a "war of attrition", with each group finding it rational to attempt to wait the others out, and stabilization occurring only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment. We solve for the expected time of stabilization in a model of "rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables. We motivate this 'approach and its results by comparison to historical and current episodes.
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Suggested Citation

  • Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
    • Handle: RePEc:fth:teavsa:6-91
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    Keywords

    tax policy ; economic models;

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