Future Policy Uncertainty, Effort, and the Responsiveness of Output to Market Signals

Joshua Aizenman and Peter Isard

Bulletin of Economic Research, 1993, vol. 45, issue 4, 305-13

Abstract: This paper analyzes the consequences of future policy uncertainty on the allocation of effort in an economy undergoing reforms. We demonstrate that uncertainty regarding future tax policies may reduce present effort, and will also reduce the responsiveness of output to productivity shocks and other market signals. The discussion has relevance for cases in which privatization will make present managers of firms the future owners and residual claimants to future output. An expectation that the purchasing price of the firm will have a positive relationship to present output will induce the manager to reduce contemporaneous effort, and uncertainty regarding the relationship will also depress present managerial effort. Copyright 1993 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1993
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