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

40 Pages Posted: 21 Jun 2004

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)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

We analyse 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.

Keywords: Growth

JEL Classification: O10, O40

Suggested Citation

Iyigun, Murat F. and Rodrik, Dani, On the Efficacy of Reforms: Policy Tinkering, Institutional Change and Entrepreneurship (June 2004). Available at SSRN: https://ssrn.com/abstract=557841

Murat F. Iyigun

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

Campus Box 256
Boulder, CO 80309
United States
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Harvard University - Center for International Development (CID) ( email )

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IZA Institute of Labor Economics

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Dani Rodrik (Contact Author)

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

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Cambridge, MA 02138
United States
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HOME PAGE: http://www.ksg.harvard.edu/rodrik/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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