Can Market Failure Cause Political Failure?
Madhav S. Aney; Maitreesh Ghatak; Massimo Morelli
- Can Market Failure Cause Political Failure?
Aney, Madhav S.
- Working papers
- Permanent URL:
- Department of Economics Discussion Papers
- Part Number:
- Department of Economics, Columbia University
- Publisher Location:
- New York
- We study how inefficiencies of market failure may be further amplified by political choices made by interest groups created in the inefficient market. We take an occupational choice framework, where agents are endowed heterogeneously with wealth and talent. In our model, market failure due to unobservability of talent endogenously creates a class structure that affects voting on institutional reform. In contrast to the world without market failure where the electorate unanimously vote in favour of surplus maximising institutional reform, we find that the preferences of these classes are often aligned in ways that creates a tension between surplus maximising and politically feasible institutional reforms.
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