Choosing between Big-Bang and Gradualist Reforms: An Option Price Approach

Posted: 7 Jul 2002

See all articles by Barbara G. Katz

Barbara G. Katz

Leonard N. Stern School of Business - Department of Economics

Joel Owen

New York University (NYU) - Department of Information, Operations, and Management Sciences

Abstract

We derive the exact conditions for choosing between the big-bang strategy and a gradualist package following the model of Dewatripont and Roland (1995, Amer. Econ. Rev. 85, 5:1207-1223). We consider gradualism as an option of early bailout and derive its option price. We show how the option price can be used to select between gradualism and the big-bang strategy, between different gradualist packages, and between the best gradualist package and the big-bang strategy. Our results show that the fundamental proposition of Dewatripont and Roland is incorrect so that we conclude that their case against the big-bang strategy is overstated.

JEL Classification: P21

Suggested Citation

Katz, Barbara G. and Owen, Joel, Choosing between Big-Bang and Gradualist Reforms: An Option Price Approach. Journal of Comparative Economics, Vol. 28, No. 1, pp. 95-107. March 2000, Available at SSRN: https://ssrn.com/abstract=228546

Barbara G. Katz (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

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Joel Owen

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

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Room 8-160
New York, NY 10012-0258
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212-998-0446 (Phone)
212-995-4003 (Fax)

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