Reforms and Confidence

28 Pages Posted: 25 Jul 2007

See all articles by Pertti Haaparanta

Pertti Haaparanta

Helsinki School of Economics

Jukka Pirttila

United Nations - World Institute for Development Economics Research (UNU/WIDER); Tampere University of Technology

Date Written: April 1, 2005

Abstract

We examine the choice of economic reforms when policymakers have present-biased preferences and can choose to discard information (maintain confidence) to mitigate distortions from excess discounting. The decisions of policymakers and firms are shown to be interdependent. Confident policymakers carry out welfare-improving reforms more often, which increases the probability that firms will invest in restructuring. While policymakers in different countries can be equally irrational, the consequences of bounded rationality are less severe in economies with beneficial initial conditions. We also examine how present-biased preferences influence the choice between big bang versus gradualist reform strategies. Our findings help explain differences in economic reform success in various countries.

Suggested Citation

Haaparanta, Pertti and Pirttila, Jukka, Reforms and Confidence (April 1, 2005). BOFIT Discussion Paper No. 1/2005. Available at SSRN: https://ssrn.com/abstract=1002925 or http://dx.doi.org/10.2139/ssrn.1002925

Pertti Haaparanta (Contact Author)

Helsinki School of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland

HOME PAGE: http://www.hse.fi/EN/HKI/H/Pertti.Haaparanta/1_ContactInfo

Jukka Pirttila

United Nations - World Institute for Development Economics Research (UNU/WIDER) ( email )

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

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