Why are Stabilizations Delayed?

Alberto Alesina () and Allan Drazen ()

No 3053, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes a "war of attrition", with each group finding it rational to attempt to wait the others out. Stabilization occurs only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment. We solve for the expected time of stabilization in a model of "rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables. We also motivate this approach and its results by comparison to historical episodes.

Date: 1989-08
Note: ME
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Related works:
Working Paper: Why Are Stabilizations Delayed? (1991)
Journal Article: Why Are Stabilizations Delayed? (1991)
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