Reforms and Confidence

Journal of Development Economics; 84:534-550, 2007, DOI: 10.1016/j.jdeveco.2006.03.002

Posted: 6 Sep 2014

See all articles by Jukka Pirttila

Jukka Pirttila

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

Pertti J. Haaparanta

Aalto University - Department of Economics

Date Written: January 1, 2007

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.

Keywords: Policy reform, Behavioural economics, Hyperbolic discounting, Confidence, Gradualism

JEL Classification: D80, O20

Suggested Citation

Pirttila, Jukka and Haaparanta, Pertti J., Reforms and Confidence (January 1, 2007). Journal of Development Economics; 84:534-550, 2007, DOI: 10.1016/j.jdeveco.2006.03.002. Available at SSRN: https://ssrn.com/abstract=2491794

Jukka Pirttila (Contact Author)

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

Pertti J. Haaparanta

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland

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