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Placebo Reforms

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  • Ran Spiegler

Abstract

I study a dynamic model of strategic reform decisions that potentially affect the stochastic evolution of a publicly observed economic variable. Policy makers maximize their evaluation by a boundedly rational public. Specifically, the public follows a rule that attributes recent changes to the most recent intervention. I analyze subgame perfect equilibrium in this model when the economic variable follows a linear growth trend with noise. Equilibrium is essentially unique and stationary, bearing a subtle formal relation to optimal search models. Policy makers tend to act during crises, display risk aversion conditional on acting, and prefer interventions that induce permanent noise.

Suggested Citation

  • Ran Spiegler, 2013. "Placebo Reforms," American Economic Review, American Economic Association, vol. 103(4), pages 1490-1506, June.
    • Handle: RePEc:aea:aecrev:v:103:y:2013:i:4:p:1490-1506
    Note: DOI: 10.1257/aer.103.4.1490
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    References listed on IDEAS

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    1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
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    3. Allan Drazen & William Easterly, 2001. "Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom," Economics and Politics, Wiley Blackwell, vol. 13(2), pages 129-157, July.
    4. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, April.
    5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    6. Spiegler, Ran, 2004. "Simplicity of beliefs and delay tactics in a concession game," Games and Economic Behavior, Elsevier, vol. 47(1), pages 200-220, April.
    7. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-1155, December.
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    Citations

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    Cited by:

    1. Anders Gustafsson, 2019. "Busy doing nothing: why politicians implement inefficient policies," Constitutional Political Economy, Springer, vol. 30(3), pages 282-299, September.
    2. Schnellenbach, Jan & Schubert, Christian, 2015. "Behavioral political economy: A survey," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 395-417.
    3. Kfir Eliaz & Ran Spiegler, 2020. "A Model of Competing Narratives," American Economic Review, American Economic Association, vol. 110(12), pages 3786-3816, December.
    4. Gabriele Gratton & Luigi Guiso & Claudio Michelacci & Massimo Morelli, 2017. "From Weber to Kafka: Political Instability and the Rise of an Inefficient Bureaucracy," EIEF Working Papers Series 1708, Einaudi Institute for Economics and Finance (EIEF), revised May 2017.
    5. Ben Lockwood & James Rockey, 2020. "Negative Voters? Electoral Competition with Loss-Aversion," The Economic Journal, Royal Economic Society, vol. 130(632), pages 2619-2648.
    6. Ignacio Esponda & Demian Pouzo, 2014. "Berk-Nash Equilibrium: A Framework for Modeling Agents with Misspecified Models," Papers 1411.1152, arXiv.org, revised Nov 2019.
    7. Anja Prummer, 2016. "Spatial Advertisement in Political Campaigns," Working Papers 805, Queen Mary University of London, School of Economics and Finance.
    8. Yingkai Li & Harry Pei, 2020. "Misspecified Beliefs about Time Lags," Papers 2012.07238, arXiv.org.
    9. Binswanger, Johannes & Oechslin, Manuel, 2020. "Better statistics, better economic policies?," European Economic Review, Elsevier, vol. 130(C).
    10. Prummer, Anja, 2020. "Micro-targeting and polarization," Journal of Public Economics, Elsevier, vol. 188(C).

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    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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