Gridlock and inefficient policy instruments Articles uri icon

authors

publication date

  • November 2019

start page

  • 1483

end page

  • 1534

issue

  • 4

volume

  • 14

International Standard Serial Number (ISSN)

  • 1933-6837

Electronic International Standard Serial Number (EISSN)

  • 1555-7561

abstract

  • Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier to repeal than efficient instruments. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument.

keywords

  • dynamic games; political economy; political instruments; bargaining