These public beliefs may have significant adverse economic consequences . Consider, for example, tax policy. A reputation for arbitrary and confiscatory tax policy discourages business development while a reputation for consistent and equitable taxes fosters business development. The effect of reputation is that a promise in a particular case is measured against past behavior. Thus a government with a reputation for arbitrary and confiscatory tax policy will have difficulty fostering a particular investment with a promise to apply taxes to that investment in a fair and consistent way.
Several factors are important for overcoming one reputation and establishing a different one.
First, a package of significant policy changes , as long as they are compatible and sustainable over time , is likely to provide a clearer and more convincing indication of a new policy direction than smaller, incremental changes. Second, a clearly articulated and consistently expressed public description of the new policy fosters its credibility. Providing information so that persons outside the government can monitor and evaluate the policy change re-enforces the credibility of the public message. Finally, establishing a new reputation takes time. Institutional structures that orient government policy incentives toward the long-term benefits of the policy shift make that policy shift more credible.