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What Hinders Structural Reforms?

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  • Shangshang Li

Abstract

This paper studies the effect of political costs on implementing structural reforms in a macroeconomic political economy model with heterogeneous agents. I consider product market deregulation as a reform measure. In the model, deregulation creates potential winners and losers, and the potential losers endogenously decide to participate in political actions to impose political costs for the government. This political cost forces the government to implement an inefficiently high regulation level. A higher proportion of liquidity-constrained workers and a higher use of fixed-term labour contracts raise market regulation levels. In addition, high initial regulation levels are associated with a larger decrease in regulation levels in subsequent periods, consistent with the empirical literature. Compensation schemes, labour market reform, and strong government leadership in negotiation also help deregulation. Finally, I use the model to discuss why product markets are more deregulated in some European countries than in others.

Suggested Citation

  • Shangshang Li, 2024. "What Hinders Structural Reforms?," Working Papers 202404, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:202404
    as

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    File URL: https://www.liverpool.ac.uk/media/livacuk/schoolofmanagement/departmentofeconomics/workingpapers/ECON,WP,202404.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    structural reforms; product market deregulation; political economy; heterogeneous-agent model;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • P11 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Planning, Coordination, and Reform

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