Working Paper: CEPR ID: DP3525
Authors: Sharun W. Mukand; Dani Rodrik
Abstract: We consider a model of policy choice in which appropriate policies depend on a country?s own circumstances, but the presence of a successful leader generates an informational externality and results in too little ?policy experimentation?. Corrupt governments are reined in while honest governments are disciplined inefficiently. Our model yields distinct predictions about the patterns of policy imitation, corruption, and economic performance as a function of a country?s location vis-à-vis successful leaders. In particular, it predicts a U-shaped pattern in economic performance as we move away from the leader in the relevant space of characteristics: close neighbors should do very well, distant countries moderately well on average with considerable variance, and intermediate countries worst of all. An empirical test with the experience of post-socialist countries provides supportive results.
Keywords: convergence; economic growth; institutions
JEL Codes: O10; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distance from successful leaders (M54) | economic performance (P17) |
| successful leaders (M54) | policy imitation (D78) |
| policy imitation (D78) | positive economic outcomes (D78) |
| distance from successful leaders (M54) | variance in economic performance (P17) |
| successful leaders (M54) | policy choices (D78) |
| informational externality (D62) | imitation among nearby countries (F55) |
| imitation among nearby countries (F55) | discipline effect (Y80) |
| governments' dilemma (H12) | policy outcomes (D78) |
| distance from successful leaders (M54) | post-transition growth rates (O41) |