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On the Political Economy of Sequential Reforms

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  • CASTRO, Rui
  • COEN-PIRANI, Daniele

Abstract

This paper proposes an explanation for why efficient reforms are not carried out when losers have the power to block their implementation, even though compensating them is feasible. We construct a signaling model with two-sided incomplete information in which a government faces the task of sequentially implementing two reforms by bargaining with interest groups. The organization of interest groups is endogenous. Compensations are distortionary and government types differ in the concern about distortions. We show that, when compensations are allowed to be informative about the government’s type, there is a bias against the payment of compensations and the implementation of reforms. This is because paying high compensations today provides incentives for some interest groups to organize and oppose subsequent reforms with the only purpose of receiving a transfer. By paying lower compensations, governments attempt to prevent such interest groups from organizing. However, this comes at the cost of reforms being blocked by interest groups with relatively high losses.

Suggested Citation

  • CASTRO, Rui & COEN-PIRANI, Daniele, 2001. "On the Political Economy of Sequential Reforms," Cahiers de recherche 2001-21, Universite de Montreal, Departement de sciences economiques.
  • Handle: RePEc:mtl:montde:2001-21
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    File URL: http://hdl.handle.net/1866/361
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    References listed on IDEAS

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    Cited by:

    1. Mitja Cok & Polona Domadenik & Tjasa Redek & Miroslav Verbic, 2009. "Labour market reforms in the context of political power theory: The case of Slovenia," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 27(1), pages 57-82.

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    More about this item

    Keywords

    reforms; interest grou; comnsations; retation;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General

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