Working Paper: CEPR ID: DP860
Authors: Mathias Dewatripont; Gerard Roland
Abstract: We present a model of large-scale economic reforms, modelled on the transition process in Eastern Europe, with aggregate and individual uncertainty concerning the outcome of reforms. The government is assumed to choose the speed and sequencing of reforms. We compare `big bang' strategies with gradualist reform packages. We show that 1) gradualist reform packages may be easier to get started; 2) optimal sequencing of reforms should aim at creating constituencies for further reforms; and 3) gradualism may reduce ex post reversibility of reforms through a strong investment response in cases where the option value of waiting generates a low investment response under `big bang'.
Keywords: transition; sequencing; political economy
JEL Codes: H89; P50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of reform strategy (P41) | political feasibility of reforms (D72) |
| gradualist reform packages (E69) | investment responses (G11) |
| investment responses (G11) | likelihood of successful reform implementation (D78) |
| optimal sequencing of reforms (C61) | political support for reforms (E69) |
| gradualism (O40) | reduced ex post reversibility of reforms (E69) |
| investment responses (G11) | option value of waiting (J22) |
| option value of waiting (J22) | deterrent to investment (F21) |