Working Paper No. 08-14
The Effects of Political Competition on the Feasibility of Economic Reform
November 2008 (updated March 2009)
This paper explores the effects of political competition on reform feasibility. In contrast to previous models, this paper shows that desirable reform may fail even in the absence of economic losers or informational asymmetries, as a result of democracy. Even if reforms were to generate economic gains for all agents, electoral gains remain a zero sum game. This model provides insight regarding the conditions under which critical elections take place as studied in the political science literature. If there is a majority party, minority parties are able to pursue low value (which do not lead to political shifts) and high value reforms (which cause a political realignment). Intermediate value reforms are harder to enact, as the electoral cost of reform is high for the dominant party. In contrast, in highly contested political environments, only high value reforms may successfully be enacted.
JEL classification: H11, O43, P16
Keywords: Democracy, Political Economy, Reform