TY  - JOUR
AU  - Iyigun,Murat
AU  - Rodrik,Dani
TI  - On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10455
PY  - 2004
Y2  - April 2004
UR  - http://www.nber.org/papers/w10455
L1  - http://www.nber.org/papers/w10455.pdf
N1  - Author contact info:
Murat Iyigun
Department of Economics
University of Colorado
Campus Box 256
Boulder, CO  80309
Tel: 303-492-6653
Fax: 303-492-8622
E-Mail: murat.iyigun@colorado.edu

Dani Rodrik
John F. Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/495-9454
Fax: 617/496-5747
E-Mail: dani_rodrik@harvard.edu
AB  - 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.
ER  -