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Reforms and Confidence

We examine the choice of economic reforms when policymakers have present-biased preferences and can choose to discard information (maintain confidence) to mitigate distortions from excess discounting. The decisions of policymakers and firms are shown to be interdependent. Confident policymakers carry out welfare-improving reforms more often, which increases the probability that firms will invest in restructuring. While policymakers in different countries can be equally irrational, the consequences of bounded rationality are less severe in economies with beneficial initial conditions. We also examine how present-biased preferences influence the choice between big bang versus gradualist reform strategies. Our findings help explain differences in economic reform success in various countries.

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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 1/2005.

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Length: 28 pages
Date of creation: 01 Apr 2005
Date of revision:
Publication status: Forthcoming in Journal of Development Economics.
Handle: RePEc:hhs:bofitp:2005_001
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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  1. Eduardo Lora & Ugo Panizza, 2002. "Structural Reforms in Latin America under Scrutiny," Research Department Publications 4303, Inter-American Development Bank, Research Department.
  2. Cooper,Russell, 1999. "Coordination Games," Cambridge Books, Cambridge University Press, number 9780521570176.
  3. Eduardo Lora & Ugo Panizza & Myriam Quispe-Agnoli, 2004. "Reform fatigue: symptoms, reasons, and implications," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 1 - 28.
  4. Rodrik, Dani & Subramanian, Arvind, 2004. "From "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition," Working Paper Series rwp04-013, Harvard University, John F. Kennedy School of Government.
  5. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
  6. Cooper,Russell, 1999. "Coordination Games," Cambridge Books, Cambridge University Press, number 9780521578967.
  7. Nauro F. Campos & Abrizio Coricelli, 2002. "Growth in Transition: What We Know, What We Don't, and What We Should," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 793-836, September.
  8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  9. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2004. "Non-Welfarist Optimal Taxation and Behavioral Public Economics," Working Papers 0433, University of Tampere, School of Management, Economics.
  10. Rabin, Mathew, 2002. "A Perspective on Psychology and Economics," Department of Economics, Working Paper Series qt4z78n1r9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  11. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
  12. Dewatripont, Mathias & Roland, Gerard, 1995. "The Design of Reform Packages under Uncertainty," American Economic Review, American Economic Association, vol. 85(5), pages 1207-23, December.
  13. Bruno Merlevede & Koen Schoors & Bas van Aarle, 2004. "Russia from Bust to Boom: Oil, Politics or the Ruble?," William Davidson Institute Working Papers Series 2004-722, William Davidson Institute at the University of Michigan.
  14. World Bank, 2005. "Economic Growth in the 1990s : Learning from a Decade of Reform," World Bank Publications, The World Bank, number 7370.
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  17. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
  18. repec:oup:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  19. Willem H. Buiter & Marcus Miller, 1983. "Changing the Rules: Economic Consequences of the Thatcher Regime," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 305-380.
  20. Alberto Melo & Andrés Rodríguez-Clare, 2006. "Productive Development Policies and Supporting Institutions in Latin America and The Caribbean," Research Department Publications 1005, Inter-American Development Bank, Research Department.
  21. Dani Rodrik & Arvind Subramanian, 2004. "From “Hindu Growth†to Productivity Surge: The Mystery of the Indian Growth Transition," IMF Working Papers 04/77, International Monetary Fund.
  22. Sheshinski, Eytan, 2003. "Optimal Policy to Influence Individual Choice Probabilities," MPRA Paper 55163, University Library of Munich, Germany.
  23. Juan D. Carrillo & Thomas Mariotti, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 529-544.
  24. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
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