Can Market Failure Cause Political Failure?
Madhav S, Aney
affiliation not provided to SSRN
London School of Economics (LSE) - Department of Economics
Columbia University - Department of Political Science; Columbia University - Department of Economics
LSE STICERD Research Paper No. EOPP029
We study how inefficiencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, 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 voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.
Number of Pages in PDF File: 31
JEL Classification: O12, O16, O17iworking papers series
Date posted: September 30, 2011
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