Primeron Reforms in a Second-Best Ambiguous Environment: A Case for Gradualism

Author/Editor:

S. Nuri Erbas

Publication Date:

March 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Ambiguity, as opposed to uncertainty, reflects lack of sufficient information about distribution and payoffs of infrequent events. Reforms are infrequent events, undertaken in ambiguous second-best environments where bad reform outcomes are feasible. A general case for the gradualist reform strategy is that it may pay to defer some reforms until relevant information about possible reform outcomes and associated probabilities is revealed, and ambiguity is reduced over time. Gradualism may dominate the big bang strategy, if some of the reforms in a reform sequence are not sure bets and waiting costs do not dominate reversal costs under some information sets forthcoming over time. The relation to Ellsberg's Paradox is discussed. Some cases for and against gradualism are reviewed.

Series:

Working Paper No. 2002/050

Subject:

Economic sectors Environment Financial institutions Financial sector National accounts Options Personal income Tariffs Taxes

Frequency:

Quarterly

English

Publication Date:

March 1, 2002

ISBN/ISSN:

9781451846980/1018-5941

Stock No:

WPIEA0502002

Pages:

56

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