What Hinders Structural Reforms?

Shangshang Li

No 202404, Working Papers from University of Liverpool, Department of Economics

Abstract: This paper studies the effect of political costs on implementing structural reforms in a macroeconomic political economy model with heterogeneous agents. I consider product market deregulation as a reform measure. In the model, deregulation creates potential winners and losers, and the potential losers endogenously decide to participate in political actions to impose political costs for the government. This political cost forces the government to implement an inefficiently high regulation level. A higher proportion of liquidity-constrained workers and a higher use of fixed-term labour contracts raise market regulation levels. In addition, high initial regulation levels are associated with a larger decrease in regulation levels in subsequent periods, consistent with the empirical literature. Compensation schemes, labour market reform, and strong government leadership in negotiation also help deregulation. Finally, I use the model to discuss why product markets are more deregulated in some European countries than in others.

Keywords: structural reforms; product market deregulation; political economy; heterogeneous-agent model (search for similar items in EconPapers)
JEL-codes: D72 E02 E60 P11 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2024
New Economics Papers: this item is included in nep-dge and nep-lma
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https://www.liverpool.ac.uk/media/livacuk/schoolof ... s/ECON,WP,202404.pdf First version, 2024

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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:202404

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