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Can Market Failure Cause Political Failure

Madhav Aney, Maitreesh Ghatak () and Massimo Morelli

No 8533, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study how inefficiencies 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 find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.

Keywords: adverse selection; asset liquidation; market failure; occupational choice; political failure; property rights (search for similar items in EconPapers)
JEL-codes: O12 O16 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm and nep-pol
Date: 2011-08
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Working Paper: Can Market Failure Cause Political Failure? (2013) Downloads
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