the choice between market failures and corruption because government intervention transfers resources from one party to another it creates room for corruption as corruption often undermines the purpose of the intervention governments will try to prevent it they may create rents for bureaucrats induce a misallocation of resources and increase the size of the bureaucracy since preventing all corruption is excessively costly second best intervention may involve a certain fraction of bureaucrats accepting bribes when corruption is harder to prevent there may be both more bureaucrats and higher public sector wages also the optimal degree of government intervention may be nonmonotonic in the level of income

political strength economic structure and the debt servicing potential of developing countries the developing countries need to reschedule their external debts is as much a consequence of the political weakness of their governments vis a vis their own societies and the international environment as it is a consequence of unfavorable structural changes in the international financial system this study s original contribution is to treat the differentials in the political strengths of debtor governments as explicit variables in analyzing the probability of ldcs having to reschedule their external debt rather than to treat political factors as residuals to an economic explanation a measure of a government s political strength relative political capacity rpc is used to evaluate the impact of a government s political strength on the probability of debt rescheduling controlling for the size of a country s debt service burden the impact of external shocks from the global system the structure of its domestic economy and whether its principal exports are agricultural raw materials minerals or man

price dispersion and incomplete learning in the long run abstract in each period a seller chooses a price and the customer for that period buys either one unit or nothing the relationship between price and purchase probability is one of two linear functions it is shown that the seller behaving optimally does not necessarily learn which function is the actual relationship since there can be a positive probability of sequences of prices converging to the price at which the two functions give the same purchase probability

an equilibrium queuing model of bribery it is sometimes argued that bribery is inefficient because bureaucrats may cause delays for attracting more bribes this hypothesis is examined in the context of a queue where customers having different values of time are ranked by their bribe payments to the queue s server the nash equilibrium strategies of the customers are derived it is shown that the server is unlikely to slow down the allocation process when bribery is allowed the model does not have stringent informational requirements and the equilibrium outcome minimizes the average value of time costs of the queue it also suggests a useful auctioning procedure

resistance to reform status quo bias in the presence of individual specific uncertainty comment why do governments so often fail to adopt policies which economists consider to be efficiency enhancing our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform we show that there is a bias towards the status quo and hence against efficiency enhancing reforms whenever some of the individual gainers and losers from reform cannot be identified beforehand there are reforms which once adopted will receive adequate political support but would have failed to carry the day ex ante the argument does not rely on risk aversion irrationality or hysteresis due to sunk costs jel d72 f13 why do governments so often fail to adopt policies that economists consider to be efficiency enhancing this is one of the fundamental questions of political economy the answer usually relies on what may be

learning while voting determinants of collective experimentation this paper combines dynamic social choice and strategic experimentation to study the following question how does a society a committee or more generally a group of individuals with potentially heterogeneous preferences experiment with new opportunities each voter recognizes that during experimentation other voters also learn about their preferences as a result pivotal voters today are biased against experimentation because it reduces their likelihood of remaining pivotal this phenomenon reduces equilibrium experimentation below the socially efficient level and may even result in a negative option value of experimentation however one can restore efficiency by designing a voting rule that depends deterministically on time another main result is that even when payoffs of a reform are independently distributed across the population good news about any individual s payoff increases other individuals incentives to experiment with that reform due to a positive voting externality

a macroeconomic model on the quality of government and economic performance i introduction the empirical analysis of hall and jones 1999 suggests that the fundamental determinant of a country s economic performance is its social infrastructure the institutions and government policies that provide incentives for individuals those incentives can encourage productive activity or predatory behavior like rent seeking and corruption although suppression of rent seeking appears to be most efficient if it is carried out by the government the power to make and enforce rules makes the government itself particularly prone to expropriation for instance while bureaucrats protect property by suppressing private rent seeking that interferes with productive activity they may also seek rents themselves by soliciting bribes from citizens 1 how do the efficiency of bureaucrats in protecting property rights and the degree of their corruption affect the relative rewards received by producers private rent seekers and bureaucrats and how does the reward structure interact with the allocation of talent between productive and unproductive activity and hence influence a country s economic performance 2 to address the above issues we work with an essentially standard macroeconomic model of production and trade externality based on the work of diamond 1982 in which productive activity is subject to private and public expropriation private rent seekers and bureaucrats do not produce they are completely dependent on producers efforts one important feature is the presence of a negative externality the unproductive activity exerts on the relative rewards that determine the allocation of agent across activity see murphy shleifer and vishny 1993 we first consider as a benchmark a model where the size of bureaucracy is exogenously given and then endogenize it as an individual s choice under an exogenous bureaucracy an agent chooses to be a producer or a private rent seeker producers conduct transactions in the decentralized markets more productive activity yields higher returns to both producers and private rent seekers and this strategic complementarity results in multiple pareto rankable equilibria the equilibrium with a larger population of producers and less rent seeking features higher welfare by choosing a small size of bureaucracy the government can establish the superior equilibrium as the unique outcome that also achieves the constrained optimum social welfare however is decreasing in the size of bureaucracy in this equilibrium the implication is that the smaller the size of bureaucracy the higher the welfare the optimal size of bureaucracy depends on two opposite influences on producers incentives one is the positive effect through better property rights protection the other includes various negative effects as a result of corruption tax burdens and the fact that resources taken up in the public sector could otherwise be devoted to production if the population of bureaucrats is endogenously determined equilibria exist as long as bureaucrats efficiency is high and corruption is low the equilibrium with a larger bureaucracy is associated with higher production and welfare the reason is that with sufficient efficiency in deterring private rent seeking and low corruption a larger bureaucracy makes private production more profitable by reducing resources allocated to private rent seeking and the resulting externality further improves the relative rewards to productive activity in general the equilibrium size of the bureaucracy is not optimal one resulting implication is that for the equilibrium with a smaller bureaucracy society would benefit by increasing the size of bureaucracy despite the fact that bureaucrats are corrupt many believe that the size of government is an important factor for determining economic performance however hall and jones 1999 p 111 argue that the characteristics of an economy such as the size of government should better be thought as outcomes rather than determinants

the case for responsible parties electoral platform convergence is perceived unfavorably by both the popular press and many academic scholars arguably to paraphrase it does not provide enough choice between candidates this article provides a formal account of the perceived negative effects of platform convergence we show that when parties do not know voters preferences precisely all voters ex ante prefer some platform divergence to convergence at the ex ante median after characterizing the unique symmetric equilibrium of competition between responsible policy motivated parties we conclude that all voters ex ante prefer responsible parties to opportunistic purely office motivated ones when parties are sufficiently ideologically polarized that platforms diverge but not so polarized that they diverge excessively however greater polarization increases the scope for office benefits as an instrument for institutional design we calculate the socially optimal level of platform divergence and show that office benefits can be used to achieve this first best outcome if parties are sufficiently ideologically polarized

on the form of transfers to special interests an important question in political economy concerns the form of transfers to special interests the chicago view is that political competition leads politicians to make such transfers efficiently the virginia position is that lack of information on the part of voters leads politicians to favor inefficient sneaky methods of redistribution this paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests it shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians inefficient methods of redistribution may be employed

learning from neighbours when payoffs from different actions are unknown agents use their own past experience as well as the experience of their neighbours to guide their decision making in this paper we develop a general framework to study the relationship between the structure of these neighbourhoods and the process of social learning we show that in a connected society local learning ensures that all agents obtain the same payoffs in the long run thus if actions have different payoffs then all agents choose the same action and social conformism obtains we develop conditions on the distribution of prior beliefs the structure of neighbourhoods and the informativeness of actions under which this action is optimal in particular we identify a property of neighbourhood structures local independencewhich greatly facilitates social learning simulations of the model generate spatial and temporal patterns of adoption that are consistent with empirical work

social mobility and redistributive politics just like economists voters have conflicting views about redistributive taxation because they estimate its incentive costs differently we model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs in the long run left wing dynasties believing less in individual effort and voting for more redistribution coexist with right wing dynasties this allows us to explain why individual mobility experience and not only current income matters for political attiitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

understanding economic policy reform one of the eventual consequences of the global debt crisis was a wave of market oriented economic reforms this paper discusses the state of our knowledge on the political economy of this process why were inefficient and often unsustainable policies maintained for so long why are so many governments reforming now after decades of adherence to policies of an opposite kind have the reformers internalized the correct lessons from the east asian experience finally are there any helpful rules for reformers to follow in guiding their policies through complicated political terrain

corruption as a gamble abstract in the following model of corruption a simple game is set up whose players are a government official granting a permit conditional on a test and a candidate requesting the permit the game is solved under different assumptions as to the information sets of the players perfect information asymmetric information and imperfect information on both sides in the latter case after characterizing the solution and presenting some important comparative statics results the paper moves on to show the emergence of multiple equilibria in corruption illustrating the interaction of corruption at different hierarchical levels of an administration

a formal model of learning and policy diffusion we present a model of learning and policy choice across governments governments choose policies with known ideological positions but initially unknown valence benefits possibly learning about those benefits between the model s two periods there are two variants of the model in one governments only learn from their own experiences while in the other they learn from one another s experiments based on similarities between these two versions we illustrate that much accepted scholarly evidence of policy di usion could simply have arisen through independent actions by governments that only learn from their own experiences however di erences between the gametheoretic and decision theoretic models point the way to future empirical tests that discern learning based policy di usion from independent policy adoptions

the design of reform packages under uncertainty the authors present a model of large scale economic reforms modeled on the transition process in eastern europe with aggregate and individual uncertainty concerning the outcome of reforms the government is assumed to choose the speed and sequencing of reforms the authors compare big bang strategies with gradualist reform packages they show that gradualist reform packages may be easier to get started optimal sequencing of reforms should aim at creating constituencies for further reforms and gradualism may generate a higher investment response because of a lower option value of waiting than would a big bang approach copyright 1995 by american economic association

searching for good policies policymaking is hard policymakers typically have imperfect information about which policies produce which outcomes and they are left with little choice but to fumble their way through the policy space via a trial and error process this raises a question at the heart of democracy do democratic systems identify good policies to answer this question i introduce a novel model of policymaking in complex environments i show that good policies are often but not always found and i identify the possibility of policymaking getting stuck at outcomes that are arbitrarily bad notably policy stickiness occurs in the model even in the absence of institutional constraints this raises the question of how institutions and the political environment impact experimentation and learning i show how a simple political friction uncertainty over voter preferences interacts with political competition and policy uncertainty in a subtle way that surprisingly improves the quality of policymaking over time

a dynamic model of corruption deterrence abstract this paper presents a model of corruption deterrence with a simple overlapping generations structure built into it a crucial assumption is that when corruption becomes more prevalent in the economy it is harder to audit a corrupt official effectively it is shown that this assumption may give rise to several stationary equilibrium levels of corruption this possibility has been exploited to explain why sometimes a government may temporarily resort to an extremely severe deterrence policy and why the same deterrence scheme may imply quite different levels of corruption a case study is provided to give empirical support to the model

a model of bureaucracy and corruption we analyze bureaucracy and corruption in a market with decentralized exchange and lemons exchange is modeled as a sequence of bilateral random matches agents have private information about the quality of goods they produce and can supplement trade with socially inefficient bribes bureaucracy is modeled as a group of agents who enjoy centralized production and consumption transaction patterns between the bureaucracy and the private sector are fully endogenous centralized production and consumption in the bureaucracy give rise to low power incentives for the individual bureaucrats as a result private agents might bribe bureaucrats whereas they do not bribe each other an equilibrium with corruption and an equilibrium without corruption can coexist we discuss some welfare implications of the model

polarization and inefficient policies of the economy in this case the costs of producing a public good the parties each propose a policy an election is held and the policy of the winning party is implemented voters and parties care about the level of the public good and costs two kinds of sequential equilibria exist revealing where voters learn the true costs and the implemented policy adjusts to costs and non revealing if parties preferences are polarized only non revealing equilibria fulfill a refinement criterion like the intuitive criterion if they are alike only revealing equilibria fulfill this criterion thus less political polarization improves information revelation in electoral democracies policy motivated parties are likely to be better informed about the functioning of the economy than are voters this paper presents a model where two parties but not voters are informed about the cost of producing a public good we study whether an electoral democracy leads to efficient production of the public good given this asymmetry of information in particular under which circumstances will the implemented policy the level of the public good reflect actual costs the main result is that the policy will reflect costs if and only if at least one of the parties has preferences which are sufficiently similar to the median voter s in this sense polarization leads to inefficiency the public good can be for instance infrastructure medicare or military services both a continuum of voters and the parties have preferences over the amount of the good that is provided by the government the preferences of the two parties are situated on each side of those of the median voter the costs of providing the good are not precisely known to the voters who only know the distribution of costs and that they will pay for these costs as taxpayers on the other hand the parties know the costs

searching and learning by trial and error i study a dynamic model of trial and error search in which agents do not have complete knowledge of how choices are mapped into outcomes agents learn about the mapping by observing the choices of earlier agents and the outcomes that are realized the key novelty is that the mapping is represented as the realized path of a brownian motion i characterize for this environment the optimal behavior each period as well as the trajectory of experimentation and learning through time applied to new product development the model shares features of the data with the well known product life cycle jel d81 d83 d92 l26

government transaction policy media of exchange and prices abstract we study government transaction policies in search theoretic models of money we model government as a subset of agents who are subject to the same random matching technology and other constraints as private agents but who behave in an exogenous way regarding which objects they accept in trade and at what price the objective is to see how these policies affect private agents strategies and hence the set of equilibria we analyze how the effects depend on factors like the size of government the intrinsic properties of money and the availability and efficacy of substitutes like barter or foreign currency journal of economic literature classification numbers c78 e31 e42

asymmetry imperfectly transferable utility and the role of fiat money in improving terms of trade abstract we modify the kiyotaki and wright 1991 j economic theory 53 215 235 1993 amer econom rev 83 63 77 framework so that there is a universal double coincidence of wants in all barter matches we also introduce divisible service sidepayments into the model and allow agents to bargain over bundles of goods services and money in bilateral matches in asymmetric matches the agent that values the other s good more dearly will typically have to make a substantial service sidepayment to complete the bargain when sidepayments transfer utility imperfectly the general equilibrium is inefficient agents barter too much when barter is inefficient a robust monetary equilibrium may exist which improves welfare both robust monetary equilibria and welfare improving monetary equilibria require asymmetric matches imperfectly transferable utility and monetary exchange yields better expected terms of trade than barter in contrast to other search models money does not speed up trade