On the Political Economy of Sequential Reforms

Rui Castro and Daniele Coen-Pirani

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper proposes an explanation for why efficient reforms are not carried out when losers have the power to block their implementation, even though compensating them is feasible. We construct a signaling model with two-sided incomplete information in which a government faces the task of sequentially implementing two reforms by bargaining with interest groups. The organization of interest groups is endogenous. Compensations are distortionary and government types differ in the concern about distortions. We show that, when compensations are allowed to be informative about the government’s type, there is a bias against the payment of compensations and the implementation of reforms. This is because paying high compensations today provides incentives for some interest groups to organize and oppose subsequent reforms with the only purpose of receiving a transfer. By paying lower compensations, governments attempt to prevent such interest groups from organizing. However, this comes at the cost of reforms being blocked by interest groups with relatively high losses.

Keywords: reforms; interest grou; comnsations; retation (search for similar items in EconPapers)
JEL-codes: D70 D72 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: On the Political Economy of Sequential Reforms (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2001-21

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