Political Risk Aversion

Author/Editor:

Laura Valderrama

Publication Date:

September 1, 2009

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:

This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. We show how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what we call political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform. We endogenize institutional reform and show a non-monotonic relationship between institutional efficiency and the size of innovation.

Series:

Working Paper No. 09/194

Subject:

English

Publication Date:

September 1, 2009

ISBN/ISSN:

9781451873412/1018-5941

Stock No:

WPIEA2009194

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

26

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