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.
*Published:
The American Economic Review, vol.81, no.5, (December 1991).
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