Gridlock and inefficient policy instruments

David Austen-Smith (), Wioletta Dziuda, Bard Harstad and Antoine Loeper
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David Austen-Smith: Kellogg School of Management, Northwestern University

Theoretical Economics, 2019, vol. 14, issue 4

Abstract: Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier than efficient instruments to repeal. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument.

Keywords: Dynamic games; bargaining; political economy; political instruments (search for similar items in EconPapers)
JEL-codes: D78 (search for similar items in EconPapers)
Date: 2019-12-02
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Citations: View citations in EconPapers (16)

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