Work

Why are Stabilizations Delayed?

Year: 1989

Type: report

Abstract: When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will attempt to shift the burden of stabilization onto other groups.The process leading to a stabilization becomes a war of attrition', with each group finding it rational to attempt to wait the others out.Stabilization occurs only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment.We solve for the expected time of stabilization in a model of 'rational" delay based on a war of attrition and present comparative statics results relating the expected time of stabilization to several political and economic variables.We also motivate this approach and its results by comparison to historical episodes.

Source: National Bureau of Economic Research

DOI: 10.3386/w3053

Authors: Alberto Alesina, Allan Drazen

Institutions: National Bureau of Economic Research, Harvard University, Centre for Economic Policy Research, Princeton University, University of Maryland, College Park

Language: English

Topic: Fiscal Policies and Political Economy

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: green

Funders: National Science Foundation, Yale University