To Shock or Not to Shock? Economics and Political Economy of Large-Scale Reforms

Authors: Lian, P.¹; Wei, S.-J.²

Source: Economics and Politics, Volume 10, Number 2, July 1998 , pp. 161-183(23)

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Abstract:

This paper studies the economics and political economy of optimal scale of reforms. The aim of the reform is to replace inefficient existing institutions by the more efficient new ones. The optimal scale of reform, in general, differs from a shock therapy that replaces the old institutions all at once. Furthermore, if agents in the economy are heterogeneous in terms of their subjective discount rates, the politically-determined reform speed may be lower in a democracy than in an economy with a benevolent dictator.

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1468-0343.00043

Affiliations: 1: Chinese University of Hong Kong, 2: Harvard University and National Bureau of Economic Research

Publication date: 1998-07-01