Publication Type
Working Paper
Version
publishedVersion
Publication Date
2-2010
Abstract
How can market failure interact with choice of institutional reform made by an electorate? We study this question in the framework of occupational choice 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 vote on institutional reform. We find that the preferences of these classes may be highly nonmonotonic in wealth and are often aligned in ways that creates a tension between institutional reforms that are growth maximising and those that are politically feasible. This is in contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform. We find that inefficiencies of market failure may be further amplifed by political choices made by interest groups created in the inefficient market.
Discipline
Political Economy
Research Areas
Economic Theory
Citation
ANEY, Madhav S.; Ghatak, Maitreesh; and Morelli, Massimo.
Can Market Failure Cause Political Failure. (2010).
Available at: https://ink.library.smu.edu.sg/soe_research/1224
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.