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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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    1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
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    3. Per Krusell & José-Víctor Ríos-Rull, 1996. "Vested Interests in a Positive Theory of Stagnation and Growth," Review of Economic Studies, Oxford University Press, vol. 63(2), pages 301-329.
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    5. Dixit, Avinash & Londregan, John, 1995. "Redistributive Politics and Economic Efficiency," American Political Science Review, Cambridge University Press, vol. 89(04), pages 856-866, December.
    6. Edward C. Prescott & Stephen L. Parente, 1999. "Monopoly Rights: A Barrier to Riches," American Economic Review, American Economic Association, vol. 89(5), pages 1216-1233, December.
    7. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    8. Rui Castro & Daniele Coen-Pirani, "undated". "Reform Implementation Under Sequential Bargaining," GSIA Working Papers 2001-E6, Carnegie Mellon University, Tepper School of Business.
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    10. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-1235, December.
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    13. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
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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, vol. 27(1), pages 57-82.

    More about this item

    Keywords

    reforms; interest grou; comnsations; retation;

    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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