Placebo Reforms

Ran Spiegler ()

American Economic Review, 2013, vol. 103, issue 4, 1490-1506

Abstract: I study a dynamic model of strategic reform decisions that potentially affect the stochastic evolution of a publicly observed economic variable. Policy makers maximize their evaluation by a boundedly rational public. Specifically, the public follows a rule that attributes recent changes to the most recent intervention. I analyze subgame perfect equilibrium in this model when the economic variable follows a linear growth trend with noise. Equilibrium is essentially unique and stationary, bearing a subtle formal relation to optimal search models. Policy makers tend to act during crises, display risk aversion conditional on acting, and prefer interventions that induce permanent noise.

JEL-codes: D78 D83 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/aer.103.4.1490
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Citations: View citations in EconPapers (16)

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