NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship

Murat Iyigun, Dani Rodrik

NBER Working Paper No. 10455
Issued in April 2004
NBER Program(s):   CF   PE

We analyze the interplay of policy reform and entrepreneurship in a model where investment decisions and policy outcomes are both subject to uncertainty. The production costs of non-traditional activities are unknown and can only be discovered by entrepreneurs who make sunk investments. The policy maker has access to two strategies: policy tinkering,' which corresponds to a new draw from a pre-existing policy regime, and institutional reform,' which corresponds to a draw from a different regime and imposes an adjustment cost on incumbent firms. Tinkering and institutional reform both have their respective advantages. Institutional reforms work best in settings where entrepreneurial activity is weak, while it is likely to produce disappointing outcomes where the cost discovery process is vibrant. We present cross-country evidence that strongly supports such a conditional relationship.

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Document Object Identifier (DOI): 10.3386/w10455

Published: Eicher, Theo S. and Cecilia Garcia-Penalosa (eds.) Institutions, Development, and Economic Growth CESifo Seminar Series. Cambridge and London: Cambridge University Press, 2006.

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