IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2002-050.html
   My bibliography  Save this paper

Primeron Reforms in a Second-Best Ambiguous Environment: A Case for Gradualism

Author

Listed:
  • Mr. S. Nuri Erbas

Abstract

Ambiguity, as opposed to uncertainty, reflects lack of sufficient information about distribution and payoffs of infrequent events. Reforms are infrequent events, undertaken in ambiguous second-best environments where bad reform outcomes are feasible. A general case for the gradualist reform strategy is that it may pay to defer some reforms until relevant information about possible reform outcomes and associated probabilities is revealed, and ambiguity is reduced over time. Gradualism may dominate the big bang strategy, if some of the reforms in a reform sequence are not sure bets and waiting costs do not dominate reversal costs under some information sets forthcoming over time. The relation to Ellsberg's Paradox is discussed. Some cases for and against gradualism are reviewed.

Suggested Citation

  • Mr. S. Nuri Erbas, 2002. "Primeron Reforms in a Second-Best Ambiguous Environment: A Case for Gradualism," IMF Working Papers 2002/050, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/050
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=15681
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-286, March.
    2. Robin M. Hogarth & Hillel J. Einhorn, 1990. "Venture Theory: A Model of Decision Weights," Management Science, INFORMS, vol. 36(7), pages 780-803, July.
    3. Dewatripont, Mathias & Roland, Gerard, 1995. "The Design of Reform Packages under Uncertainty," American Economic Review, American Economic Association, vol. 85(5), pages 1207-1223, December.
    4. Cukierman, Alex & Liviatan, Nissan, 1992. "The Dynamics of Optimal Gradual Stabilizations," The World Bank Economic Review, World Bank, vol. 6(3), pages 439-458, September.
    5. Gilboa Itzhak & Schmeidler David, 1993. "Updating Ambiguous Beliefs," Journal of Economic Theory, Elsevier, vol. 59(1), pages 33-49, February.
    6. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 29-42.
    7. Blanchard, Olivier J., 1985. "Credibility, disinflation and gradualism," Economics Letters, Elsevier, vol. 17(3), pages 211-217.
    8. Mariano Tommasi & Andrés Velasco, 1996. "Where are we in the political economy of reform?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(2), pages 187-238.
    9. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, March.
    10. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
    11. Froot, Kenneth A. (ed.), 1999. "The Financing of Catastrophe Risk," National Bureau of Economic Research Books, University of Chicago Press, number 9780226266237, December.
    12. Camerer, Colin & Weber, Martin, 1992. "Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-370, October.
    13. Segal, Uzi, 1987. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 175-202, February.
    14. Alberto Alesina & Alex Cukierman, 1990. "The Politics of Ambiguity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 829-850.
    15. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    16. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    17. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    18. Epstein Larry G. & Le Breton Michel, 1993. "Dynamically Consistent Beliefs Must Be Bayesian," Journal of Economic Theory, Elsevier, vol. 61(1), pages 1-22, October.
    19. C. Martinelli & M. Tommasi, 1997. "Sequencing of Economic Reforms in the Presence of Political Constraints," Economics and Politics, Wiley Blackwell, vol. 9(2), pages 115-131, July.
    20. Mr. Eduardo Borensztein, 1993. "The Strategy of Reform in the Previously Centrally-Planned Economies of Eastern Europe: Lessons and Challenges," IMF Policy Discussion Papers 1993/006, International Monetary Fund.
    21. Mr. R. B. Johnston, 1994. "The Speed of Financial Sector Reform: Risks and Strategies," IMF Policy Discussion Papers 1994/026, International Monetary Fund.
    22. Rodrik, Dani, 1993. "The Positive Economics of Policy Reform," American Economic Review, American Economic Association, vol. 83(2), pages 356-361, May.
    23. Auernheimer, Leonardo & George, Susan Mary, 1997. "Shock versus gradualism in models of rational expectations: the case of trade liberalization," Journal of Development Economics, Elsevier, vol. 54(2), pages 307-322, December.
    24. Mr. Aasim M. Husain & Ms. Ratna Sahay, 1992. "Does Sequencing of Privatization Matter in Reforming Planned Economies?," IMF Working Papers 1992/013, International Monetary Fund.
    25. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-1668, December.
    26. George Stigler, 1939. "Production and Distribution in the Short Run," Journal of Political Economy, University of Chicago Press, vol. 47, pages 305-305.
    27. William Fellner, 1961. "Distortion of Subjective Probabilities as a Reaction to Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 670-689.
    28. Claude Henry, 1974. "Investment decisions under uncertainty: The "irreversibility effect"," ULB Institutional Repository 2013/327343, ULB -- Universite Libre de Bruxelles.
    29. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-563, June.
    30. Alan J. Auerbach & Kevin A. Hassett, 1999. "Uncertainty and the Design of Long-Run Fiscal Policy," NBER Working Papers 7036, National Bureau of Economic Research, Inc.
    31. Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 13-32.
    32. Ms. Rina Bhattacharya, 1999. "Political Economy Aspects of Trade and Financial Liberalization: Implications for Sequencing," IMF Working Papers 1999/159, International Monetary Fund.
    33. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    34. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    35. David E. Bell, 1982. "Regret in Decision Making under Uncertainty," Operations Research, INFORMS, vol. 30(5), pages 961-981, October.
    36. Vito Tanzi, 1998. "Government Role and the Efficiency of Policy Instruments," Palgrave Macmillan Books, in: Peter Birch Sørensen (ed.), Public Finance in a Changing World, chapter 2, pages 51-69, Palgrave Macmillan.
    37. P. Lian & S.‐J. Wei, 1998. "To Shock or Not to Shock? Economics and Political Economy of Large‐Scale Reforms," Economics and Politics, Wiley Blackwell, vol. 10(2), pages 161-183, July.
    38. Howard Raiffa, 1961. "Risk, Ambiguity, and the Savage Axioms: Comment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 690-694.
    39. Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages 225-250, October.
    40. 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 1146-1155, December.
    41. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    42. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 271-282.
    43. Kahn, Barbara E & Sarin, Rakesh K, 1988. "Modeling Ambiguity in Decisions under Uncertainty," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 15(2), pages 265-272, September.
    44. Aasim M. Husain & Ratna Sahay, 1992. "Does Sequencing of Privatization Matter in Reforming Planned Economies?," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 801-824, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
    2. Mr. S. Nuri Erbas, 2003. "Imf Conditionality and Program Ownership: A Case for Streamlined Conditionality," IMF Working Papers 2003/098, International Monetary Fund.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Camerer, Colin & Weber, Martin, 1992. "Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-370, October.
    2. Marc Willinger, 1990. "La rénovation des fondements de l'utilité et du risque," Revue Économique, Programme National Persée, vol. 41(1), pages 5-48.
    3. LANGE Andreas & TREICH Nicolas, 2007. "Uncertainty, Learning and Ambiguity in Economic Models on Climate Policy: Some Classical Results and New Directions," LERNA Working Papers 07.16.237, LERNA, University of Toulouse.
    4. Dillenberger, David & Segal, Uzi, 2017. "Skewed noise," Journal of Economic Theory, Elsevier, vol. 169(C), pages 344-364.
    5. Hagen Lindstädt, 2004. "Entscheidungskalküle jenseits des subjektiven Erwartungsnutzens," Schmalenbach Journal of Business Research, Springer, vol. 56(6), pages 495-519, September.
    6. Aurélien Baillon & Laure Cabantous & Peter Wakker, 2012. "Aggregating imprecise or conflicting beliefs: An experimental investigation using modern ambiguity theories," Journal of Risk and Uncertainty, Springer, vol. 44(2), pages 115-147, April.
    7. Segal, Uzi, 1987. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 175-202, February.
    8. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    9. repec:cup:judgdm:v:2:y:2007:i::p:390-397 is not listed on IDEAS
    10. Jean Desrochers & J. Francois Outreville, 2013. "Uncertainty, Ambiguity and Risk Taking: an experimental investigation of consumer behavior and demand for insurance," ICER Working Papers 10-2013, ICER - International Centre for Economic Research.
    11. L. Robin Keller & Rakesh K. Sarin & Jayavel Sounderpandian, 2007. "An examination of ambiguity aversion: Are two heads better than one?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 2, pages 390-397, December.
    12. Andreas Lange, 2003. "Climate Change and the Irreversibility Effect – Combining Expected Utility and MaxiMin," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(4), pages 417-434, August.
    13. Roca, Mercè & Maule, A. John, 2009. "The effects of endowment on the demand for probabilistic information," Organizational Behavior and Human Decision Processes, Elsevier, vol. 109(1), pages 56-66, May.
    14. Huber, Jürgen & Kirchler, Michael & Stefan, Matthias, 2014. "Experimental evidence on varying uncertainty and skewness in laboratory double-auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 798-809.
    15. Koch, Christopher & Schunk, Daniel, 2007. "The Case for Limited Auditor Liability - The Effects of Liability Size on Risk Aversion and Ambiguity Aversion," Sonderforschungsbereich 504 Publications 07-04, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    16. Johanna Etner & Meglena Jeleva & Jean‐Marc Tallon, 2012. "Decision Theory Under Ambiguity," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 234-270, April.
    17. Carlo Zappia, 2015. "Daniel Ellsberg on the Ellsberg Paradox," Department of Economics University of Siena 716, Department of Economics, University of Siena.
    18. Karni, Edi & Maccheroni, Fabio & Marinacci, Massimo, 2015. "Ambiguity and Nonexpected Utility," Handbook of Game Theory with Economic Applications,, Elsevier.
    19. Paul Dolan & Martin Jones, 2004. "Explaining Attitudes Towards Ambiguity: An Experimental Test Of The Comparative Ignorance Hypothesis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(3), pages 281-301, August.
    20. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
    21. Riddel, Mary C. & Shaw, W. Douglass, 2006. "A Theoretically-Consistent Empirical Non-Expected Utility Model of Ambiguity: Nuclear Waste Mortality Risk and Yucca Mountain," Pre-Prints 23964, Texas A&M University, Department of Agricultural Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2002/050. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.