American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Placebo Reforms
American Economic Review
(pp. 1490–1506)
Abstract
I study a dynamic model of strategic reform decisions that potentially affect the stochastic evolution of a publicly observed economic variable. Policy makers maximize their evaluation by a boundedly rational public. Specifically, the public follows a rule that attributes recent changes to the most recent intervention. I analyze subgame perfect equilibrium in this model when the economic variable follows a linear growth trend with noise. Equilibrium is essentially unique and stationary, bearing a subtle formal relation to optimal search models. Policy makers tend to act during crises, display risk aversion conditional on acting, and prefer interventions that induce permanent noise.Citation
Spiegler, Ran. 2013. "Placebo Reforms." American Economic Review 103 (4): 1490–1506. DOI: 10.1257/aer.103.4.1490Additional Materials
JEL Classification
- D78 Positive Analysis of Policy-Making and Implementation
- D83 Search; Learning; Information and Knowledge; Communication; Belief