BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 1/2005:
Reforms and Confidence
Pertti Haaparanta ()
and Jukka Pirttilä ()
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; con…dence; gradualism; (follow links to similar papers)
28 pages, April 1, 2005
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- This paper is forthcoming as:
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Haaparanta, Pertti and Jukka Pirttilä, 'Reforms and Confidence', Journal of Development Economics.
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