Gridlock and inefficient policy instruments

Austen-Smith, David, Dziuda, Wioletta, Harstad, Bård Gjul & Loeper, Antoine

Photo: Theoretical Economics

Theoretical Economics

Published in:

Theoretical Economics, November 2019.

DOI: 10.3982/TE3329


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 than efficient instruments to repeal. 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.

Published Dec. 16, 2019 2:13 PM - Last modified Nov. 10, 2020 12:55 PM