On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship

39 Pages Posted: 13 May 2004 Last revised: 30 Oct 2014

See all articles by Murat Iyigun

Murat Iyigun

University of Colorado at Boulder - Department of Economics; Harvard University - Center for International Development (CID); IZA Institute of Labor Economics

Dani Rodrik

Harvard University - Harvard Kennedy School (HKS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: April 2004

Abstract

We analyze the interplay of policy reform and entrepreneurship in a model where investment decisions and policy outcomes are both subject to uncertainty. The production costs of non-traditional activities are unknown and can only be discovered by entrepreneurs who make sunk investments. The policy maker has access to two strategies: policy tinkering,' which corresponds to a new draw from a pre-existing policy regime, and institutional reform,' which corresponds to a draw from a different regime and imposes an adjustment cost on incumbent firms. Tinkering and institutional reform both have their respective advantages. Institutional reforms work best in settings where entrepreneurial activity is weak, while it is likely to produce disappointing outcomes where the cost discovery process is vibrant. We present cross-country evidence that strongly supports such a conditional relationship.

Suggested Citation

Iyigun, Murat F. and Rodrik, Dani, On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship (April 2004). NBER Working Paper No. w10455, Available at SSRN: https://ssrn.com/abstract=538503

Murat F. Iyigun

University of Colorado at Boulder - Department of Economics ( email )

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Harvard University - Center for International Development (CID) ( email )

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Dani Rodrik (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.ksg.harvard.edu/rodrik/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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