Can Market Failure Cause Political Failure?

Maitreesh Ghatak, Madhav S Aney and Massimo Morelli
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Madhav S Aney: Singapore Management University
Massimo Morelli: Columbia University

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

Abstract: We study how ineffciencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, where agents are endowed heterogeneously with wealth and talent. In our model, market failure due to unobservability of talent endogenously creates a class structure that affects voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we nd that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.

Keywords: occupational choice; adverse selection; property rights; asset liquidation; po- litical failure; market failure (search for similar items in EconPapers)
Date: 2013
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http://www2.warwick.ac.uk/fac/soc/economics/resear ... /122.2013_ghatak.pdf

Related works:
Working Paper: Can Market Failure Cause Political Failure? (2011)
Working Paper: Can Market Failure Cause Political Failure (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cge:wacage:122

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